Chapter 1 Quality Control and Engagement Standards-1

Chapter 1 – Quality control and Engagement Standards ©www.altclasses.
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Chapter 1 – Quality control and Engagement Standards ©www.altclasses.in
Chapter 1
Quality Control and Engagement
Standards
"Marks Distribution of Past Exams (New Syllabus)"
40
35
30
25
Marks
20
15
10
5
0
May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21 -
Series1 37 32 19
*For May 2019, Marks are given only for subjective questions.
1.1 – SQC 1 “Quality Control for Firms that perform Audits &Reviews of
Historical Financial Information and Other Assurance and Related
Services Engagements”
Q.1 BSS & Associates is a partnership firm of Chartered Accountants which

was established five years back. The firm was offering only advisory
services at the beginning, however, after audit rotation and advent of
GST, firm sees lot of potential in these areas also and started looking for
opportunities in these areas also. These services being assurance in
nature, the firm required some internal restructuring and set up some
policies and procedures for compliance year on year.
The firm started getting new clients for these new services and is now
looking to obtain such information as it considers necessary in the

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circumstances before accepting an engagement with a new client, when

deciding whether to continue an existing engagement, and when
considering acceptance of a new engagement with an existing client.
Where issues have been identified, and the firm decides to accept or
continue the client relationship or a specific engagement, it has been
setting up a process to document how the issues were resolved.
The firm is now looking to work with only select clients which are in
line with the policies of the firm. The firm understands that the extent
of knowledge it will have regarding the integrity of a client will grow
within the context of an ongoing relationship with that client. With
regard to the integrity of a client, you are required to give some
examples of the matters to be considered by the firm as per the
requirements of SQC 1. [RTP-May 19]
Or
MB & Associates is a partnership firm of the Chartered Accountants
which was established seven years back. The firm is getting new clients
and has also been offered new engagement services with existing
clients. The firm is concerned about obtaining such information as It
considers necessary in the circumstances before accepting an
engagement with a new client and acceptance of a new engagement
with an existing client. The firm is looking to work with only select
clients to adhere to the Quality Control Standards. Guide MB &
Associates about the matters to be considered with regard to the
integrity of a client, as per the requirements of SQC 1.
[Nov. 19 – New Syllabus (4 Marks)]

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Answer: Considerations as to integrity of clients:
• As per SQC-1 “Quality Control for Firms that Perform Audits and
Reviews of Historical Financial Information, and Other
Assurance and Related Services Engagements” a firm should
establish a system of quality control designed to provide it with
reasonable assurance that the firm and its personnel comply
with professional standards and regulatory and legal
requirements, and that reports issued by the firm are
appropriate in the circumstances.
• Accordingly, the firm should obtain such information as it
considers necessary in the circumstances before accepting an
engagement with a new client, when deciding whether to
continue an existing engagement, and when considering
acceptance of a new engagement with an existing client. Where
issues have been identified, and the firm decides to accept or
continue the client relationship or a specific engagement, it
should document how the issues were resolved.
Considerations as to integrity of clients:
With regard to the integrity of a client, matters that the firm
considers include, for example:
1. The identity and business reputation of the client’s principal
owners, key management, related parties and those charged
with its governance.

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2. The nature of the client’s operations, including its business
practices.
3. Information concerning the attitude of the client’s principal
owners, key management and those charged with its
governance towards such matters as aggressive interpretation
of accounting standards and the internal control environment.
4. Whether the client is aggressively concerned with maintaining
the firm’s fees as low as possible.
5. Indications of an inappropriate limitation in the scope of work.
6. Indications that the client might be involved in money
laundering or other criminal activities.
7. The reasons for the proposed appointment of the firm and
non-reappointment of the previous firm.
The extent of knowledge a firm will have regarding the integrity
of a client will generally grow within the context of an ongoing
relationship with that client.
Q.2 You are an audit senior working for the firm Bohra & Company. You are
currently carrying out the audit of Wisdom Ltd., a manufacturer of
waste paper bins. You are unhappy with Wisdom Ltd.’s inventory
valuation policy and have raised the issue several times with the audit
manager. He has dealt with the client for a number of years and does
not see what you are making an objection about. He has refused to meet
you on site to discuss those issues.

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As the audit manager had dealt with Wisdom Ltd. for so many years, the
other partners have decided to leave the audit of Wisdom Ltd. in his
capable hands. Comment on the situation outlines above.
Answer: Quality Control Issues in an engagement:
• SQC – 1 “Quality Control for Firms that perform Audits and
Reviews of Historical Financial Information and Other Assurance
and Related Services Engagements” requires a firm to establish
the policies & procedures for dealing/resolving differences of
opinion with in engagement team.
• An engagement partner is usually appointed to each audit
engagement undertaken by the firm, to take responsibility for
the engagement on behalf of the firm. Assigning the audit to an
experienced audit manager is not sufficient.
• SA 220 “Quality Control for an Audit of Financial Statement”,
requires that the audit engagement partner takes responsibility
for settling disputes in accordance with the firm’s policy in
respect of resolution of difference of opinion required by SQC 1.
• In the present case, partners of the firm have decided to leave
the audit in the hands of Audit manager and no engagement
partner has been assigned. The lack of an audit engagement
partner also means that several of the requirements of SA 220,
about ensuring that engagements in relation to independence
and directing, supervising and reviewing the audit are not in
place.

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• Further, the audit manager and senior have conflicting views
about the valuation of inventory. This does not appear to have
been handled well, with the manager refusing to discuss the
issue with the senior.
Conclusion: Failure to resolve the difference of opinion is a breach
of the firm’s policy under SQC 1. It indicates that the firm does not
have a suitable policy concerning such disputes required by SQC1.
1.2 - SA 200 “Overall Objectives of the Independent Auditor and Conduct of an
Audit in accordance with SA”
Q.3 Discuss with reference to SAs: The auditor is responsible for maintaining
an attitude of professional skepticism throughout the audit. Do you
agree with the statement?
Answer: Professional Skepticism:
(a) SA 200 “Overall Objectives of the Independent Auditor and
Conduct of Audit in accordance with SAs” requires that the
auditor shall plan and perform an audit with professional
skepticism.
(b) Meaning of Professional Skepticism: An attitude that includes
a questioning mind, being alert to conditions which may indicate
possible misstatement due to error or fraud, and a critical
assessment of audit evidence.
(c) Professional Skepticism Reduces risk of:

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• Overlooking unusual circumstances.
• Over generalising when drawing conclusions from audit
observations.
• Using inappropriate assumptions in determining N, T, E of
audit procedures & evaluating the results thereof.
(d) Professional skepticism includes being alter to:
• Contradictory audit evidence.
• Questions on reliability of documents.
• Conditions indicating possible frauds.
• Circumstances suggesting need for audit procedures in
addition to those suggested in SAs.
Q.4 “An Opinion expressed by the auditor is neither an assurance as to the
future viability of the enterprise nor the efficiency or effectiveness with
which management has conducted the affairs of the enterprise.”
Answer: Auditor’s responsibility to express an opinion:
• “SA 200 “Overall Objectives of the Independent Auditor and
Conduct of Audit in accordance with SAs” stats that in conducting
an audit of financial statements, the auditor is required to express
an opinion that whether the F.S. are prepared, in all material
respects, in accordance with an applicable FRF.
• The opinion expressed by the auditor is common to all audits of
financial statements.
• For this purpose of expressing opinion he is required to obtain

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reasonable assurance about whether the F.S. as a whole are free
from material misstatement, whether due to fraud or error.
• The term reasonable assurance has been defined as higher level of
assurance but not absolute.
• The auditor’s opinion, therefore, does not assure, the future
viability of the entity nor the efficiency or effectiveness with
which management has conducted the affairs of the entity.
1.3 - SA 210 “Agreeing the Terms of Audit Engagement”
Q.5 Mr. Ram Kapoor, Chartered Accountant, has been appointed as the
statutory auditor by XYZ Private Limited for the audit of their financial
statements for the year 2018-19. The company has mentioned in the
audit terms that they will not be able to provide internal audit reports
to Mr. Ram during the course of audit. Further, company also imposed
some limitation on scope of Mr. Ram.
What are the preconditions Mr. Ram should ensure before accepting/
refusing the proposal? Also advise, whether Mr. Ram should accept the
proposed audit engagement? [RTP-Nov. 19]
Answer: Preconditions for an audit engagement:
SA 210 “Agreeing the Terms of Engagement” deals with the
auditor’s responsibilities in agreeing the terms of the audit
engagement with management. Before accepting/ refusing an audit
engagement, to establish whether the preconditions for an audit

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are present, the auditor shall:
(a) Determine whether the financial reporting framework to be
applied in the preparation of the financial statements is
acceptable; and
(b) Obtain the agreement of management that it acknowledges and
understands its responsibilities for followings:
(i) the preparation of the F.S. in accordance with the
applicable FRF.
(ii) exercising necessary internal control to enable the
preparation of F.S. that are free from material
misstatement, whether due to fraud or error.
(iii) to provide the auditor with:
(a) Access to all relevant information such as records,
documentation and other matters;
(b) Additional information that the auditor may request
from management for the purpose of the audit; and
(c) Unrestricted access to persons within the entity from
whom the auditor determines it necessary to obtain
audit evidence.
Q.6 AKJ Ltd. is a small-sized 30 years old company having business of
manufacturing of pipes. Company has a plant based out of Dehradun
and have their corporate office in Delhi. Recently the company
appointed new firm of Chartered Accountants as their statutory
auditors.

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The statutory auditors want to enter into an engagement letter with the
company in respect of their services but the management has
contended that since the statutory audit is mandated by law,
engagement letter may not be required. Auditors did not agree to this
and have shared a format of engagement letter with the management
for their reference before getting that signed. In this respect
management would like to understand that as per SA 210 (auditing
standard referred to by the auditors), if the agreed terms of the
engagement shall be recorded in an engagement letter or other suitable
form of written agreement, what should be included in terms of agreed
audit engagement letter? [MTP-April 19]
Answer: Agreement on Audit Engagement Terms:
SA 210 “Agreeing the Terms of Audit Engagement” deals with the
engagement with management and, where appropriate, those
charged with governance. Accordingly,
(1) The auditor shall agree the terms of the audit engagement with
management or TCWG, as appropriate.
(2) The agreed terms of the audit engagement shall be recorded in
an audit engagement letter or other suitable form of written
agreement and shall include:
(a) The objective and scope of the audit of the F.S.;

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(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable FRF for the preparation of
the F.S.; and
(e) Reference to the expected form and content of any reports
to be issued by the auditor and a statement that there may
be circumstances in which a report may differ from its
expected form and content.
(3) If law or regulation prescribes in sufficient detail the terms of
the audit engagement referred above, the auditor need not
record them in a written agreement, except for the fact that
such law or regulation applies and that management
acknowledges and understands its responsibilities.
Q.7 Comment on the following: “It is not mandatory to send a new

engagement letter in recurring audit, but sometimes it becomes
mandatory to send new letter.” Explain those situations where new
engagement letter is to be sent.
Or
R & Co., a firm of Chartered Accountants have not revised the terms of
engagements and obtained confirmation from the clients, for last 5
years despite changes in business and professional development.
Please elucidate the circumstances that may warrant the revision in
terms of engagement. [May 13 (4 Marks)]

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Answer: Situations in which new engagement letter is required in case

of recurring audit:
• SA 210 “Agreeing the Terms of Engagement” deals with the
engagement with management. As per SA 210, in case of
recurring audits, the auditor shall assess whether circumstances
require revision in terms of the audit engagement and whether
there is a need to remind the entity of the existing terms of the
audit engagement.
• The auditor may decide not to send a new audit engagement
letter or other written agreement each period. However, the
following factors may make it appropriate to revise the terms of
the audit engagement or to remind the entity of existing terms:
1. Any indication that the entity misunderstands the objective
and scope of the audit.
2. Any revised or special terms of the audit engagement.
3. A recent change of senior management.
4. A significant change in ownership.
5. A significant change in nature or size of the entity’s business.
6. A change in legal or regulatory requirements.
7. A change in the financial reporting framework adopted in the
preparation of the F.S.
8. A change in other reporting requirements.
“ICAI Examiner Comments”

Many candidates failed to mention most of the circumstances that may warrant the
revision in terms of engagement. Some candidates answered the areas to be changed in
the engagement letter.

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Q.8 X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing
their accounts. He sent his letter of engagement to the Board of
Directors, which was accepted by the Company. In the course of audit of
the company, the auditor was unable to obtain appropriate sufficient
audit evidence regarding receivables. The client requested for a change
in the terms of engagement. Offer your comments in this regard.
Answer: Acceptance of changes in Terms of Engagement:
• SA 210 “Agreeing the Terms of Engagement” deals with the
engagement with management. As per SA 210, if prior to
completing the audit engagement, the auditor is requested to
change the audit engagement to an engagement that conveys a
lower level of assurance, the auditor shall determine whether
there is reasonable justification for doing so.
• The auditor shall not agree to a change in the terms of the audit
engagement where there is no reasonable justification for doing
so.
• If the terms of the audit engagement are changed, the auditor
and management shall agree on and record the new terms of the
engagement in an engagement letter or other suitable form of
written agreement.
• If the auditor is unable to agree to a change of the terms of the
audit engagement and is not permitted by management to
continue the original audit engagement, the auditor shall:

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1. Withdraw from the audit engagement where possible under
applicable law or regulation; and
2. Determine whether there is any obligation, either contractual
or otherwise, to report the circumstances to other parties,
such as TCWG, owners or regulators.
1.4 - SA 220 “Quality Control for an Audit of Financial Statements”
Q.9 During the audit of FMP Ltd, a listed company, Engagement Partner
(EP) completed his reviews and also ensured compliance with
independence requirements that apply to the audit engagement. The
engagement files were also reviewed by the Engagement Quality
Control Reviewer (EQCR) except the independence assessment
documentation. Engagement Partner was of the view that matters
related to independence assessment are the responsibility of the
Engagement Partner and not Engagement Quality Control Reviewer.
Engagement Quality Control Reviewer objected to this and refused to
sign off the documentation. Please advise as per SA 220.
[RTP-May 19, MTP-Oct. 19]
Answer: Responsibilities of EP and EQCR in relation to assessment of

independence:
• As per SA 220 “Quality control for an Audit of Financial

Statements” the engagement partner shall form a conclusion on
compliance with independence requirements that apply to the
audit engagement. In doing so, the engagement partner shall:

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(a) Obtain relevant information from the firm and, where

applicable, network firms, to identify and evaluate
circumstances and relationships that create threats to
independence;
(b) Evaluate information on identified breaches, if any, of the
firm’s independence policies and procedures to determine
whether they create a threat to independence for the audit
engagement; and
(c) Take appropriate action to eliminate such threats or reduce
them to an acceptable level by applying safeguards, or, if
considered appropriate, to withdraw from the audit
engagement, where withdrawal is permitted by law or
regulation. The engagement partner shall promptly report to
the firm any inability to resolve the matter for appropriate
action.
• For audits of financial statements of listed entities, the

engagement quality control reviewer, on performing an
engagement quality control review, shall also consider among
other things, the engagement team’s evaluation of the firm’s
independence in relation to the audit engagement.
Conclusion: View of EP that matters related to independence

assessment are the responsibility of the EP and not EQCR is not
correct. The independence assessment documentation should also
be given to EQCR for his review.

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Q.10 M/s Suresh chandra & Co. has been appointed as an auditor of SC Ltd.
for the financial year 2018-19. CA. Suresh, one of the partners of M/s
Suresh chandra & Co., completed entire routine audit work by 29th
May, 2019. Unfortunately, on the very next morning, while roving
towards office of SC Ltd. to sign final audit report, he met with a road
accident and died. CA. Chandra, another partner of M/s Suresh
chandra & Co., therefore, signed the accounts of SC Ltd., without
reviewing the work performed by CA. Suresh.
State with reasons whether CA. Chandra is right in expressing an
opinion on financial statements the audit of which is performed by
another auditor. [MTP-April 18]
Answer: Review of Work performed by others:
• As per SA 220, “Quality Control for an Audit of Financial
Statements”, the engagement partner shall take responsibility
for reviews being performed in accordance with the firm’s
review policies and procedures. Review procedures consists of
the considerations, whether,
1. the work has been performed in accordance with
professional standards and regulatory and legal
requirements;
2. Significant matters have been raised for further

consideration;
3. appropriate consultations have taken place and the resulting
conclusions have been documented and implemented;

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4. the work performed supports the conclusions reached and is
appropriately documented;
5. the evidence obtained is sufficient and appropriate to
support the auditor’s report; and
6. the objectives of the engagement procedures have been
achieved.
• When the auditor delegates work to assistants or uses work
performed by other auditors/experts he will continue to be
responsible for forming and expressing his opinion on the
financial statements. However, he will be entitled to rely on the
work performed by others, provided he exercises adequate skill
and care and is not aware of any reason to believe that he
should not have so relied.
• The auditor should carefully direct, supervise and review work
delegated to assistants. He should obtain reasonable assurance
that work performed by other auditors/experts and assistants
is adequate for his purpose.
• In the instant case, Mr. Suresh, a partner of the firm had
completed routine audit work and died before signing audit
report. Mr. Chandra another partner of the firm has signed the
accounts of SC Ltd, relying on the work performed by Mr.
Suresh.

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Conclusion: CA. Chandra is allowed to sign the audit report,

though, will be responsible for expressing the opinion. He may
rely on the work performed by CA. Suresh provided he further
exercises adequate skill and due care and review the work
performed by him.
Q.11 Mention any four information which assists the auditor in accepting
and continuing of relationship with the client as per SA 220.
Answer: Information assisting auditor in accepting and continuing of
relationship with the client:
As per SA 220 “Quality Control for an Audit of F.S.” the
information which assists the auditor in accepting and continuing
of relationship with the client may include the following:
• The Integrity of the principal owners, key management and
TCWG of the entity;
• Competency of engagement team to perform the audit
engagement and availability of necessary capabilities, including
time and resources;
• Compliance with relevant ethical requirements by firm and the
engagement team; and
• Significant matters that have arisen during the current or
previous audit engagement, and their implications for
continuing the relationship.

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Q.12 OP & Associates are the statutory auditors of BB Ltd. BB Ltd is a listed
company and started its operations 5 years back. The field work
during the audit of the financial statements of the company for the
year ended March 31, 2019 got completed on May 1, 2019. The
auditor’s report was dated May 12, 2019. During the documentation
review of the engagement, it was observed that the engagement
quality control review was completed on May 15, 2019. Engagement
partner had completed his reviews in entirety by May 10, 2019.
Comment. [MTP-Oct. 18]
Answer: Review by Engagement Partner:
• As per SA 220, “Quality Control for an Audit of Financial
Statements”, the engagement partner shall take responsibility
for reviews being performed in accordance with the firm’s
review policies and procedures. For audits of financial
statements of listed entities, the engagement partner shall:
(a) Determine that an engagement quality control reviewer has
been appointed;
(b) Discuss significant matters arising during the audit
engagement, including those identified during the
engagement quality control review, with the engagement
quality control reviewer; and
(c) Not date the auditor’s report until the completion of the
engagement quality control review.

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• Further, SA 700, “Forming an Opinion and Reporting on
Financial Statements”, requires the auditor’s report to be dated
no earlier than the date on which the auditor has obtained
sufficient appropriate evidence on which to base the auditor’s
opinion on the financial statements.
• In the present case, OP & Associates are the statutory auditors
of a listed company which started its operations 5 years back.
The field work during the audit of the financial statements of
the company for the year ended March 31, 2019 got completed
on May 1, 2019. The auditor’s report was dated May 12, 2019.
During the documentation review of the engagement, it was
observed that the engagement quality control review was
completed on May 15, 2019.
Conclusion: Signing of auditor’s report i.e. on May 12, 2019
which is before the completion of review engagement quality
control review i.e. May 15, 2019, is not in order.
1.5 - SA 230 “AUDIT DOCUMENTATION”
Q.13 Mr. A, a practicing Chartered Accountant, has been appointed as an
auditor of True Pvt. Ltd. What factors would influence the amount of
working papers required to be maintained for the purpose of his
audit? [Nov. 15 (5 Marks), RTP-May 20]
Answer: Factors affecting Form, Content and Extent of Audit
Documentation:

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SA 230 “Audit Documentation” deals with the auditor’s
responsibility to prepare audit documentation for an audit of
financial statements. Accordingly, the various factors that may
affect form, content and extent of audit documentation are
following
1. The size and complexity of the entity.
2. The nature of the audit procedures to be performed.
3. The identified risks of material misstatement.
4. The significance of the audit evidence obtained.
5. The nature and extent of exceptions identified.
6. The need to document a conclusion or the basis for a
conclusion not readily determinable from the documentation
of the work performed or audit evidence obtained.
7. The audit methodology and tools used.
8. Timely preparation of Audit Documentation.
Many examinees did not discuss the factors influencing the amount of audit working
papers and the answers were general in nature explaining the type of working papers.
Also some examinees wrote about the importance of working papers. A few examinees
described the need of the working papers which was not required. Some examinees also
discussed about current audit file and permanent audit file.
Q.14 Discuss the Auditor’s responsibilities to provide access to his audit
working papers to Regulators and the third parties.
[Nov. 14 (3 Marks)]

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Answer: Access to Working papers to Regulators and Third Parties:
• Clause (1) of Part I of Second Schedule to the Chartered
Accountants Act, 1949 states that a CA in practice shall be
deemed to be guilty of professional misconduct if he discloses
information acquired in the course of his professional
engagement to any person other than his client, without the
consent of his client or otherwise than as required by law for
the time being in force.
• SA 200 on “Overall Objectives of the Independent Auditor and
the conduct of an audit in accordance with Standards on
Auditing” also reiterates that, “the auditor should respect the
confidentiality of the information obtained and should not
disclose any such information to any third party without
specific authority or unless there is a legal or professional duty
to disclose”. If there is a request to provide access by the
regulator based on the legal requirement, the same has to be
complied with after informing the client about the same.
• SQC–1, “Quality Control for Firms that Perform Audits and
Reviews of Historical Financial Information, and Other
Assurance and Related Services Engagements”, provides that,
unless otherwise specified by law or regulation, audit
documentation is the property of the auditor. He may at his
discretion, make portions of, or extracts from, audit
documentation available to clients, provided such disclosure

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does not undermine the validity of the work performed, or, in
the case of assurance engagements, the independence of the
auditor or of his personnel.
• As per SA 230, Audit documentation serves a number of
additional purposes, including the enabling the conduct of
external inspections in accordance with applicable legal,
regulatory or other requirements.
Conclusion: It is auditor’s responsibility to provide access to his
audit working papers to Regulators when required by law
whereas auditor is under no obligation to provide access to working

papers to third parties.
Q.15 As an auditor, how would you deal with the following: The statutory
auditor of the Holding Company demands for the working papers of
the auditors of the subsidiary company, of which you are the auditor?
Answer: Access to working papers:
• As per SA 230, “Audit Documentation” working papers are the
property of the auditor. The auditor may, at his discretion,
make portion of or extracts of his working papers available to
his client.
• SA 600 “Using the Work of Another Auditors” also states that an
auditor should respect the confidentiality of information
acquired during the course of his audit work and should not
disclose such information unless there is a legal or professional
duty to disclose.

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• As per ICAI Guidelines, statutory auditor of an enterprise does

not have right of access to the audit working papers of the
branch auditor. An auditor can rely on the work of another
auditor, without having any right of access to the audit working
papers of other auditor.
Conclusion: Statutory auditor of Holding company cannot have

access to audit working papers of the subsidiary company’s
auditor. He can however, ask the auditor to answer certain
questions about the manner in which the audit is conducted and
certain other clarifications regarding audit.
Q.16 B is the Principal Auditor of ABC Co. Ltd., with 8 branches audited by 8
Branch Auditors. B wanted to ensure that the works of Branch
Auditors were adequate for the purpose of his audit. Hence, he
insisted on Branch Auditors to get familiar with a check list he
prepared for branches and, besides, required them to share the
working papers complied by them for his review and return. Is
principal auditor within his right in asking for such sharing of working
papers? [May 18 – New Syllabus (5 Marks)]
Answer: Principal Auditor’s right to review the working papers of
branch auditors:
• SA 600 “Using the Work of Another Auditor” guides principal
auditor regarding the procedures to be performed when he is
using the work of another auditor. As per SA 600, when
principal auditor plans to use the work of branch auditor, he

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should consider the professional competence of the other
auditor in the context of specific assignment if the other auditor
is not a member of the ICAI. He should perform procedures to
obtain sufficient appropriate audit evidence, that the work of
the other auditor is adequate for the principal auditor's
purposes, in the context of the specific assignment.
• As per SA 230 “Audit Documentation” and SQC 1 “Quality
Control for Firms that Perform Audits and Reviews of Historical
Financial Information, and Other Assurance and Related
Services Engagements”, unless otherwise specified by law or
regulation, audit documentation is the property of the auditor.
The Principal auditors of an enterprise do not have right of
access to the audit working papers of the branch auditors.
• In the present case, Mr. B requires the branch auditors to share
their working papers with him for the purpose of review.
Conclusion: considering the requirements of SA 600, SA 230 and
SQC 1, principal auditor is not right in asking for sharing of
working papers.
1.6 - SA 240 “The Auditor’s Responsibilities relating to Fraud in an Audit of
F.S.”
Q.17 In the course of audit, A Ltd you suspect the management has indulged
in fraudulent financial reporting? State the possible source of such
fraudulent financial reporting. [May 12 (6 Marks)]

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Answer: Possible Sources of Fraudulent Financial Reporting:

SA 240, “The Auditor’s responsibilities relating to Fraud in an
Audit of Financial Statements”, deals with auditor’s
responsibilities in relation to fraud while performing the audit.
Auditor is primarily concerned with those frauds that causes
material misstatement in financial statements.
Possible sources of fraudulent financial reporting as stated in SA
240 are:
1. Recording fictitious journal entries, particularly close to the

end of an accounting period, to manipulate operating results
or achieve other objectives.
2. Inappropriately adjusting assumptions and changing
judgments used to estimate account balances.
3. Omitting, advancing or delaying recognition in the financial
statements of events and transactions that have occurred
during the reporting period.
4. Concealing, or not disclosing, facts that could affect the
amounts recorded in the financial statements.
5. Engaging in complex transactions that are structured to
misrepresent the financial position or financial performance
of the entity.
6. Altering records and terms related to significant and unusual
transactions.
While some have a good grip over the topic, few have no idea on the practical aspects of
possible sources of fraudulent financial reporting.

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Q.18 You are appointed as an auditor of Global Ltd. Explain the risk factors
relating to misstatements arising from misappropriation of assets.
[Nov. 15 (4 Marks)]
Answer: Risk Factors relating to misstatements arising from
misappropriation of Assets:
Accordingly, various risk factors that relate to misstatements
arising from misappropriation of assets are classified according
to the below mentioned conditions generally present when
fraud exists:
1. Incentive or pressure to commit fraud: It may exist when
management is under pressure, from sources outside or
inside the entity, to achieve an expected (and perhaps
unrealistic) earnings target or financial outcome.
2. A perceived opportunity to do so: It may exist when an
individual believes internal control can be overridden, for
example, because the individual is in a position of trust or has
knowledge of specific weaknesses in internal control.
3. Rationalization of the Act: Individuals may be able to
rationalize committing a fraudulent act. Some individuals
possess an attitude, character or set of ethical values that
allow them knowingly and intentionally to commit a

Page 28
dishonest act. However, even otherwise honest individuals
can commit fraud in an environment that imposes sufficient
pressure on them.

The conditions generally present when fraud exists namely incentives/pressures,
opportunities, and attitudes/rationalization are not focused by majority of
examinees. Examinees wrote irrelevant answers. Many examinees explained the
effect of misappropriation of assets instead of risk factors relating to misstatements
arising from misappropriation of assets.
Q.19 Explain briefly duties and responsibilities of an auditor in case of

material misstatements resulting from management fraud.
[Nov. 09, May 17 (6 Marks)]
or
Cloud Ltd. appointed an auditor for the financial year 2019-20. While
going through the audit procedure, the auditor observed that the
management has entered into certain transactions which are irregular
in nature and the management is personally benefited from such
transactions. Explain briefly the duties and responsibilities of an
auditor in case of material misstatement resulting from Management
Fraud.
Or
Fraud can be committed by management overriding controls using
such techniques as engaging in complex transactions that are
structured to misrepresent the financial position or financial
performance of the entity. In view of the above-mentioned
circumstances of management fraud, explain briefly duties and
responsibilities of an auditor in case of material misstatement
resulting from such Management Fraud.

Page 29
Answer: Auditor’s duties in case of material misstatement resulting
from management fraud:
(a) SA 240 “Auditor’s Responsibilities relating to fraud in an
audit of financial statements” requires that the auditor is
responsible for obtaining reasonable assurance that the F.S.
taken as a whole are free from material misstatement,
whether caused by fraud or error.
(b) Management is in a unique position to perpetrate fraud
because of management’s ability to manipulate accounting
records and prepare fraudulent financial statements by
overriding controls.
(c) When obtaining reasonable assurance, the auditor is
responsible for maintaining an attitude of professional
skepticism throughout the audit.
(d) The auditor should recognize the possibility that a material
misstatement due to fraud could exist, notwithstanding his
past experience of the honesty and integrity of the entity’s
management and those charged with governance
(e) If conditions cause the auditor to believe that a document
may not be authentic or that terms in a document have been
modified, the auditor shall investigate further.
(f) Where responses to inquiries of management or TCWG are
inconsistent, the auditor shall investigate the inconsistencies.

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(g) Section 143(12) of Companies Act 2013 requires that if an

auditor of a company in the course of the performance of his
duties as auditor, has reason to believe that an offence of
fraud involving such amount or amounts as may be
prescribed, is being or has been committed in the company
by its officers or employees, the auditor shall report the
matter to the Central Government within such time and in
such manner as may be prescribed. For this purpose, Rule 13
of CAAR, 2014 prescribes the amount of Rs. 1 Cr. or more.
(h) Para 3(x) of CARO, 2016 also requires the company auditor
to report whether any fraud by the company or any fraud on
the company by its officers or employees has been noticed or
reported during the year; If yes, the nature and the amount
involved is to be indicated.
Most of the candidates could not write the duties and responsibilities of an auditor in case
of material misstatements resulting from management fraud correctly.
Q.20 You notice a misstatement resulting from fraud or suspected fraud
during the audit and conclude that it is not possible to continue the
performance of audit. As a Statutory Auditor, how would you deal?
Answer: Auditor’s unable to complete the engagement:

Accordingly, if the auditor conclude that it is not possible to
continue performing the audit as a result of misstatement
resulting from fraud or suspected fraud, the auditor should:

Page 31
(a) Consider the professional and legal responsibilities
applicable in the circumstances, including whether there is
a requirement for the auditor to report to the person or
persons who made the audit appointment or, in some cases,
to regulatory authorities;
(b) Consider the possibility of withdrawing from the
engagement; and
(c) If the auditor withdraws:
• Discuss with the appropriate level of management and
TCWG, the auditor’s withdrawal from the engagement
and the reasons for the withdrawal; and
• Determine whether there is a professional or legal
requirement to report to the person or persons who
made the audit appointment or, in some cases, to
regulatory authorities, the auditor’s withdrawal from the
engagement and the reasons for the withdrawal.
Further, as per section 140(2) of the Companies Act, 2013, the
auditor who has resigned from the company shall file within a
period of 30 days from the date of resignation, a statement in the
Form ADT-3 with the company and the Registrar.
Section 143(12) of Companies Act 2013 requires that if an
duties as auditor, has reason to believe that an offence of fraud
involving such amount or amounts as may be prescribed, is being

Page 32
or has been committed in the company by its officers or
employees, the auditor shall report the matter to the Central
Government within such time and in such manner as may be
prescribed. For this purpose, Rule 13 prescribes the amount of
Rs. 1 Cr. or more.
Q.21 The Managing Director of the Company has committed a “Teeming and
Lading” Fraud. The amount involved has been however subsequently
after the year end deposited in the company. As a Statutory Auditor,
how would you deal?
Answer: Fraud Committed by Managing Director:
• SA 240 “Auditor’s Responsibilities relating to fraud in an audit

of financial statements” requires that the auditor is responsible
for obtaining reasonable assurance that the F.S. taken as a
whole are free from material misstatement, whether caused by
fraud or error.
• Management is in a unique position to perpetrate fraud
because of management’s ability to manipulate accounting
records and prepare fraudulent financial statements by
overriding controls.
• In the instant case, Managing Director of the company has
committed a “Teeming and Lading” fraud. The fact that the
amount involved has been subsequently deposited after the
year end is not important because the auditor is required to
perform his responsibilities as laid down in SA 240 as stated
below:

Page 33
(a) Consider the impact of fraud on financial statements and
its disclosure in the audit report.
(b) Communicate the matter to the Chairman and Board of
Directors.
(c) Consider the reliability of audit evidence previously
obtained as the fraud has been conducted at a higher level
of management which raises a genuine doubt about
representations of management.
• Section 143(12) of Companies Act 2013 requires that if an
involving such amount or amounts as may be prescribed, is
being or has been committed in the company by its officers or
Rs. 1 Cr. or more.
• Para 3(x) of CARO, 2016 also requires the company auditor to
report whether any fraud by the company or any fraud on the
company by its officers or employees has been noticed or

Page 34
Q.22 As a Statutory Auditor, how would you deal with the following cases:
In the books of accounts of M/s OPQ Ltd. huge differences are noticed
between the control accounts and subsidiary records. The Chief
Accountant informs that this is common due to huge volume of
business done by the company during the year.
Answer: Difference between Control Accounts and Subsidiary Records:
• The huge differences found between control accounts and
subsidiary records in the books of M/s OPQ Ltd. indicate that
there may be material misstatements requiring detailed
examination by the auditor to ascertain the cause.
• The contention of Chief Accountant cannot be accepted simply
because the company has done huge volume of business. Such a
phenomenon indicates that recording of transactions is not
being done properly or the accounting system fails to capture
all transactions in time.
• Having regard to all these circumstances, it appears from the
facts of the case that these differences indicate the possibility of
some kind of material misstatements.
• According to SA 240 “The Auditors responsibilities relating to
Fraud in an audit of F.S.”, when the auditor comes across such
circumstances indicating the possible misstatements resulting
from entity’s procedure, the auditor shall evaluate whether
such a misstatement is indicative of fraud.

Page 35
• In this case, the circumstances indicate the possibility of
material misstatements (that might be due to fraud) and
accordingly, the auditor must investigate further to consider
effect on F.S.
Rs. 1 Cr. or more.
company by its officers or employees has been noticed or
Q.23 While conducting statutory Audit of ABC Ltd., you come across IOUs
amounting to Rs. 2 crores as against a cash balance shown in books of
Rs. 2.10 crores. You also observe that despite similar high balances
throughout the year, small amounts of Rs. 50,000 are withdrawn from
the bank to meet day-to-day expenses. [May 09 (5 Marks)]

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Answer: Auditor’s duties in case of suspected fraud:
• SA 240 “Auditor’s Responsibilities relating to fraud in an audit

of financial statements” requires that the auditor is responsible
for obtaining reasonable assurance that the F.S. taken as a
whole are free from material misstatement, whether caused by
fraud or error.
• When obtaining reasonable assurance, the auditor is
responsible for maintaining an attitude of professional
skepticism throughout the audit.
• The auditor should recognize the possibility that a material
misstatement due to fraud could exist.
• When the auditor comes across such circumstances indicating
the possible misstatements resulting from entity’s procedure,
the auditor shall evaluate whether such a misstatement is
indicative of fraud.
• In the present case, the circumstances indicate the possibility of
fraud and accordingly, the auditor must investigate further to
consider effect on financial statements.
• The Guidance Note on Audit of Cash and Bank balances also
mentions that if the entity is maintaining an unduly large
balance of cash, he should carry out surprise verification of cash
more frequently to ascertain whether it agrees. If cash in hand
is not in agreement with the book balance, he should seek
explanations and if the same are not satisfactory, he should
state this fact appropriately in his Audit Report.

Page 37
Q.24 M/s Honest Limited has entered into a transaction on 5th March, 2019,
near year-end, whereby it has agreed to pay Rs. 5 lakhs per month to
Mr. Y as annual retainer-ship fee for "engineering consultation". No
amount was actually paid, but Rs. 60 lakhs are provided in books of
account as on March 31, 2019. Your inquiry elicits a response that
need-based consultation was obtained round the year, but there is no
documentary or other evidence of receipt of the service. As the auditor
of M/s Honest Limited, what would be your approach?
[Nov. 13 (5 Marks), RTP-Nov. 18]
Answer: Auditor’s duties in case of suspected fraud:
• As per SA 240 on “The Auditor’s Responsibilities Relating to
Fraud in an Audit of Financial Statements”, fraud can be
committed by management by various means including therein
recording of fictitious journal entries, particularly close to the
end of an accounting period, to manipulate operating results or
achieve other objectives.
• In the given case, Honest Ltd. has entered into an agreement
with Mr. Y, at year-end, for engineering consultation. It also
provides Rs. 60 lakhs in the books of accounts, however, no
documentary or other evidence of receipt of such service is
available. It appears that company has passed fictitious journal
entries, near year-end, to manipulate the operating results.

Page 38
• SA 240 further provides that if, as a result of a misstatement
resulting from fraud or suspected fraud, the auditor encounters
exceptional circumstances that bring into question the auditor’s
ability to continue performing the audit, the auditor shall:
(1) Determine the professional and legal responsibilities
applicable in the circumstances, including whether there is
a requirement for the auditor to report to the person or
persons who made the audit appointment or, in some cases,
to regulatory authorities;
(2) Consider whether it is appropriate to withdraw from the
engagement, where withdrawal from the engagement is
legally permitted.
• Further, Sec. 143(12) of the Companies Act, 2013 read with
Rule 13 of Companies (Audit & Auditor’s) Rules, 2016 requires
that if an auditor of a company, in the course of the
performance of his duties as auditor, has reason to believe that
an offence involving fraud is being or has been committed
against the company by officers or employees of the company,
he shall immediately report the matter to the audit committee
within 2 days of his knowledge (as amount involved is less than
Rs. 1 Cr.) mentioning the following:
(i) Nature of Fraud with description;
(ii) Approximate amount involved; and
(iii) Parties involved etc.

Page 39
company by its officers ore0mployees has been noticed or

Most of the candidates failed to identify the suspected fraud in the financial statement in
accordance with SA 240 and many related it to wrong accounting and creation of
provision as per AS-29. Also, some candidates confined themselves to the audit
procedures to verify/vouch the transaction and looking for evidence, whereas the
question makes it very clear that no evidence is available.
Q.25 Is it appropriate for the auditor to make inquiries of management
regarding management’s own assessment of the risk of fraud and the
controls in place to prevent and detect it? Discuss.
[Nov. 16 (5 Marks)]
Answer: Appropriateness of making inquiries of management
regarding assessment of fraud:
SA 240 “Auditor’s Responsibilities relating to Fraud in an Audit
of Financial Statements” requires the auditor to make inquiries
of management regarding:
(a) Management’s assessment of risk of material misstatement
due to fraud;
(b) Management’s process for identifying & responding to the
risks of fraud in the entity, including any specific risks of
fraud;
(c) Management’s communication, if any, to TCWG; and

Page 40
(d) Management’s communication, if any, to employees
regarding its views on business practices and ethical
behavior.
Management is responsible for the entity’s internal control and
for the preparation of the financial statements. Accordingly, it is
appropriate for the auditor to make inquiries of management
regarding management’s own assessment of the risk of fraud
and the controls in place to prevent and detect it.
The nature, extent and frequency of management’s assessment
of such risk and controls may vary from entity to entity. In some
entities, management may make detailed assessments on an
annual basis or as part of continuous monitoring. In other
entities, management’s assessment may be less structured and
less frequent.
The nature, extent and frequency of management’s assessment
are relevant to the auditor’s understanding of the entity’s
control environment. For example, the fact that management has
not made an assessment of the risk of fraud may in some
circumstances be indicative of the lack of importance that
management places on internal control.
Most of the examinees have not understood the topic and failed to answer correctly.

Page 41
1.7 - SA 250 “Considerations of Laws and Regulations in an Audit of Financial
Statements”
Q.26 Comment on the following: Management is responsible for
compliance with Laws and regulations.
Answer: Management Responsibility for compliance with laws and

regulation:
SA 250 “Consideration of Laws and Regulations in an audit of
Financial Statements” states that it is the responsibility of
management, with the oversight of TCWG, to ensure that the
entity’s operations are conducted in accordance with the
provisions of laws and regulations.
For this purpose, management may apply the following
procedures:
1. Monitoring legal requirements and ensuring that operating

procedures are designed to meet these requirements.
2. Instituting and operating appropriate systems of internal
control.
3. Developing, publicising and following a code of conduct.
4. Ensuring employees are properly trained and understand the
code of conduct.
5. Monitoring compliance with the code of conduct and acting
appropriately to discipline employees who fail to comply with
it.
6. Engaging legal advisors to assist in monitoring legal
requirements.

Page 42
7. Maintaining a register of significant laws and regulations with
which the entity has to comply within its particular industry
and a record of complaints.
Q.27 What are the roles and responsibilities of the statutory auditor in
relation to compliance with the laws and regulations by the entity?
[Nov. 14 (5 Marks)]
Answer: Role & Responsibilities of Statutory auditor in relation to
compliance of Laws and Regulations:
• The auditor shall obtain a general understanding of:
(a) The legal and regulatory framework applicable to the
entity and the industry or sector in which the entity
operates; and
(b) How the entity is complying with that framework.
• The auditor shall obtain sufficient appropriate audit evidence
regarding compliance with the provisions of those laws and
regulations generally recognized to have a direct effect on the
determination of material amounts and disclosures in the
• The auditor shall perform the following audit procedures to
identify instances of noncompliance with other laws and
regulations that may have a material effect on the financial
statements:
(a) Inquiring of management; and

Page 43
(b) Inspecting correspondence, if any, with the relevant
licensing or regulatory authorities.
• During the audit, the auditor shall remain alert to the
possibility that other audit procedures applied may bring
instances of non-compliance or suspected non-compliance
with laws and regulations to the auditor’s attention.
• Obtain written representation that all known instances of non-
compliance or suspected noncompliance with laws and
regulations have been disclosed to the auditor.

Very few candidates explained SA 250 and gave general answers. Most of them failed to
give the required answer which should be based on the audit procedures to identify
instances of non-compliance with other laws and regulations that may have a material
effect on the financial statements.
Q.28 As a statutory auditor of a company, comment on the following: While
verifying the employee records in a company, it was found that a
major portion of the labour employed was child labour. On
questioning the management, the auditor was told that it was outside
his scope of the financial audit to look into the compliance with other
laws. [Nov. 12 (5 Marks), RTP-May 18]
Or
CA. Yusuf has been appointed as an auditor of Ajanta Ltd., a textile
entity. While going through the employee records of the company, CA.
Yusuf identified that most of the labourers employed are of the age
between 11-12 years. On enquiring the same, the management argues

Page 44
that there is no such boundation with regard to employment of such
lower age children and contends that it is out of the scope of audit as
well to check such compliance. Comment in the context of relevant
standard on auditing whether the contention of management is
tenable.
Answer: Auditor’s Responsibility for consideration of other Laws:
• SA 250 “Consideration of laws and regulations in an Audit of
Financial statements” requires the auditor to obtain sufficient
appropriate audit evidence regarding the compliance with the
provisions of those laws and regulations generally recognized
to have a direct impact on the determination of material
amounts and disclosures in the financial statements including
tax and labour laws.
• For the other laws, the auditor’s responsibility is limited to
undertake specified audit procedures to help identify non-
compliance with those laws and regulations that may have a
material effect on the financial statements.
• Non–compliance with other laws and regulations may result
in fines, litigation or other consequences for the entity, the
costs of which may need to be provided for.
• In the instant case, major portion of the labour employed was
child labour.

Page 45
Conclusion: Auditor should ensure the disclosure of above fact
and provision of the cost of fines, litigation or other
consequences. In case auditor concludes that non-compliance
may have a material effect on financial statements., he should
modify his opinion accordingly.
Q.29 R & M Co. wants to be alert on the possibility of non-compliance with
Laws and Regulations during the course of audit of SRS Ltd. R & M Co.
seeks your guidance for identifying the indications of non-compliance
with Laws and Regulations. [May 16 (5 Marks)]
Or
As an Auditor of TRP Ltd., you are suspicious that there might be non-
compliance with laws and regulations to which the company is
subject to. Indicate the possible areas or aspects where you may have
to look out for forming an opinion as to whether your suspicion has
some based to further inquire. [May 18 – New Syllabus (4 Marks)]
Answer: Indicators to be considered for verifying compliance with

laws and regulations:
SA 250 “Consideration of Laws and Regulations in an audit of
Financial Statements” deals with the auditor’s responsibilities to
consider laws and regulations when performing an audit.
To verify the compliance of laws and regulations, auditor is
required to consider the following indicators:
1. Investigation by regulatory organisations Government
departments or payment of fines, additional taxes or
penalties.

Page 46
2. Payments for unspecified services or loans to consultants
related parties or employees.
3. Sales commission or agent’s fees that appear excessive in
relation to those ordinarily paid by the entity or in its
industry or to the services actually received.
4. Purchases at prices significantly above or below market
price.
5. Unusual payments in cash.
6. Unusual payments towards legal and retainership fees.
7. Unusual transactions with companies registered in tax
havens.
8. Payments for goods or services made other than to the
country from which the goods or services originated.
9. Payments without proper exchange control documentation.
10. Existence of an information system which fails to provide an
adequate audit trail.
11. Unauthorised transactions or improperly recorded
transactions.
12. Adverse media comment.

Candidates failed to mention all the important indications correctly. Some of them
discussed the reporting requirement by the auditor in the case of non-compliance
instead of indications.

Page 47
Q.30 State the reporting responsibility of an auditor in the context of non-
compliance of Law and Regulation in an audit of Financial Statement.
Answer: Reporting requirements as per SA 250 on Non-Compliance
with Laws and regulations:
(a) Reporting to Management & TCWG:
• The auditor shall communicate with TCWG matters
involving non-compliance with laws and regulations that
come to the auditor’s attention.
• If, in the auditor’s judgment, the non-compliance is
believed to be intentional and material, the auditor shall
communicate the matter to TCWG as soon as practicable.
• If the auditor suspects that management or TCWG are
involved in noncompliance, the auditor shall communicate
the matter to the next higher level of authority at the
entity, if it exists, such as an audit committee or
supervisory board. Where no higher authority exists, the
auditor shall consider the need to obtain legal advice.
(b) Reporting in Auditor’s Report:
• If the auditor concludes that the non-compliance has a
material effect on the financial statements and has not
been adequately reflected in the financial statements, the
auditor shall, express a qualified or adverse opinion on the

Page 48
• If the auditor is precluded by management or TCWG from
obtaining sufficient appropriate audit evidence, the
auditor shall express a qualified opinion or disclaim an
opinion.
• If the auditor is unable to determine whether non-
compliance has occurred because of limitations imposed
by the circumstances rather than by management or
TCWG, the auditor shall evaluate the effect on the auditor’s
opinion.
(c) Reporting to regulatory and Enforcement Authorities:
If the auditor has identified or suspects non-compliance with
laws and regulations, the auditor shall determine whether
the auditor has a responsibility to report the identified or
suspected non-compliance to parties outside the entity.
1.8 - SA 260 “Communication with Those Charged eith Governance”
Q.31 Discuss with reference to SAs: The auditor shall communicate all
significant findings with those charged with Governance.
Or
“The auditors should communicate audit matters of governance
interest arising from the audit of financial statements with those
charged with the governance of an entity”. Briefly state the matters to
be included in such Communication.

Page 49
Answer: Communicating Significant Finding to TCWG:
SA 260 “Communication with Those charged with Governance”
deals with auditor’s responsibilities to communicate with TCWG
in an audit of financial statements.
As per SA 260, auditor should communicate all significant
findings with the TCWG, stated as below:
1. The auditor’s views about significant qualitative aspects of the
entity’s accounting practices, including accounting policies,
accounting estimates and financial statement disclosures.
2. Significant difficulties, if any, encountered during the audit;
3. Unless all of those charged with governance are involved in
managing the entity:
• Significant matters, arising from the audit that were
discussed, or subject to correspondence with management;
and
• Written representations the auditor is requesting;
4. Circumstances that affect the form and content of the auditor’s
report, if any; and
5. Any other significant matter that in the auditor’s professional
judgment, are significant to the oversight of the financial
reporting process.
Q.32 State the Significant Difficulties encountered during audit with
reference to SA 260.

Page 50
Answer: Significant Difficulties encountered during audit:
in an audit of financial statements.
As per SA 260 among other things auditor should communicate
significant difficulties to the TCWG. Examples of significant
difficulties to be communicated are:
1. Significant delays in management providing required
information.
2. An unnecessarily brief time within which to complete the
audit.
3. Extensive unexpected effort required to obtain SAAE.
4. Unavailability of expected information.
5. Restrictions imposed on the auditor by management.
6. Scope limitation that leads to modification of auditor’s
opinion.
Q.33 Write short note on: Factors governing modes of communication of
auditor with those charged with governance.
Answer: Factors affecting mode of Communication:
in an audit of financial statements. As per SA 260 the various

Page 51
factors affecting mode of communication are:
1. Whether a discussion of the matter will be included in the
auditor’s report e.g. Key Audit matters.
2. Whether management has previously communicated the
matter.
3. The size, operating structure, control environment, and legal
structure of the entity.
4. In the case of an audit of special purpose F.S., whether the
auditor also audits the entity’s general purpose F.S.
5. Legal requirements. In some jurisdictions, a written
communication with TCWG is required in a prescribed form
by local law.
6. The expectations of TCWG, including arrangements made for
periodic meetings or communications with the auditor.
7. The amount of ongoing contact and dialogue the auditor has
with TCWG.
8. Whether there have been significant changes in the
membership of a governing body.
Q.34 Compare and explain the following: Reporting to Shareholders vs.
reporting to TCWG. [Nov. 14 (3 Marks)]

Page 52
Answer: Reporting to Shareholders vs. Reporting to those Charged
with Governance:
Reporting to Shareholders Reporting to TCWG
1. SA 700, 701, 705 & 706 1. SA 260 deals with the
&Section 143 of the provisions relating to
Companies Act, 2013 deals reporting to those Charged
with the provisions relating with Governance.
to reporting to Shareholders.
2. Reporting to shareholder 2. Reporting to TCWG
generally focuses on true and generally includes auditor’s
fair view of financial responsibilities, planned
statements. scope and timing of audit,
significant findings from the
audit and independence.
3. Reporting to shareholders is 3. Reporting to TCWG is an
an external report and issued internal report and not

Most of the candidates discussed only meanings of the topic in general.
in public domain. issued in public domain.
1.9 - SA 265 “Communicating Deficiencies in Internal Control to Those
Charged With Governance”
Q.35 What do you mean by deficiencies in Internal Control? Explain various
indicators of Significant deficiencies.
Answer: Deficiencies in Internal Control:

Page 53
SA 265 “Communicating Deficiencies in Internal Control to Those
Charged with Governance and Management” states that
deficiency in internal control exists when:
(a) A control is designed, implemented or operated in such a way
that it is unable to prevent, or detect and correct,
misstatements in the financial statements on a timely basis;
or
(b) A control necessary to prevent, or detect and correct,
misstatements in the financial statements on a timely basis is
missing.
Indicators of Significant Deficiencies:
1. Evidence of ineffective aspects of control environment.
2. Entity’s Risk assessment process – Absent/ineffective.
3. Ineffective response to identified significant Risks.
4. Correction of prior period misstatements arising due to
fraud/error.
5. Management inability to oversee F.S. Preparation.
6. Misstatements detected by the auditor’s procedures were not
prevented or detected and corrected by the entity internal
control.
Q.36 Write short note on: Written communication in respect of deficiencies
of internal control.
Answer: Written communication in respect of deficiencies of internal
control:

Page 54
The auditor shall communicate material weaknesses in internal
control identified during the audit on a timely basis to
management at an appropriate level of responsibility, and, as
required by SA 265 “Communicating Deficiencies in Internal
Control to Those Charged with Governance and Management”.
This communication should be, preferably, in writing through a
letter of weakness. Important points with regard to such a letter
are as follows:
(a) It lists down the area of weaknesses in the internal control
system and recommends suggestions for improvement.
(b) It should clearly indicate that this letter covers only
weaknesses which have come to the attention of the auditor
during his evaluation of internal control for the purpose of
determining nature, timing and extent of further audit
procedures.
(c) Letter should clearly indicate that his examination of internal
control has not been designed to determine the adequacy of
internal control for management.
(d) This letter serves as a significant means for management and
governing body for the purpose of improving the system and
its strict implementation.
(e) The letter may also serve to minimize legal liability in the
event of a major defalcation or other loss resulting from a
weakness in internal control.

Page 55
1.10 - SA 299 “Joint Audit of Financial Statements”
Q.37 KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr.
Z as joint auditors to conduct auditing for the financial year 2019-20.
For the valuation of gratuity scheme of the company, Mr. X, Mr. Y and
Mr. Z wanted to refer their own known Actuaries. Due to difference of
opinion, all the joint auditors consulted their respective Actuaries.
Subsequently, major difference was found in the actuary reports.
However, Mr. X agreed to Mr. Y’s actuary report, though, Mr. Z did not.
Mr. X contends that Mr. Y’s actuary report shall be considered in audit
report due to majority of votes. Now, Mr. Z is in dilemma.
(i) You are required to briefly explain the responsibilities of auditors
when they are jointly and severally responsible in respect of audit
conducted by them and also guide Mr. Z in such situation.
(ii) Explain the responsibility of auditors, in case, report made by Mr.
Y’s actuary, later on, found faulty. [Nov. 18-RTP]
Answer: Responsibilities of Joint auditors:

SA 299 “Joint Audit of Financial Statements” lays down the
principles for effective conduct of joint audit to achieve the overall
objectives of the auditor as laid down in SA 200.
Accordingly, in respect of audit work divided among the joint
auditors, each joint auditor shall be responsible only for the work
allocated to such joint auditor including proper execution of the
audit procedures. All the joint auditors shall be jointly and
severally responsible for:

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a. the audit work which is not divided among the joint auditors
and is carried out by all joint auditors;
b. decisions taken by all the joint auditors under audit planning in
respect of common audit areas concerning the NTE of the audit
procedures to be performed by each of the joint auditors.
c. matters which are brought to the notice of the joint auditors by
any one of them and on which there is an agreement among the
joint auditors;
d. examining that the F.S. of the entity comply with the
requirements of the relevant statutes;
e. presentation and disclosure of the F.S. as required by the
applicable FRF;
f. ensuring that the audit report complies with the requirements
of the relevant statutes, the applicable Standards on Auditing
and the other relevant pronouncements issued by ICAI.
It shall be the responsibility of each joint auditor to determine the
NTE of audit procedures to be applied in relation to the areas of
work allocated to said joint auditor.
It is the individual responsibility of each joint auditor to study and
evaluate the prevailing system of internal control and assessment
of risk relating to the areas of work allocated to said joint auditor.
Reporting Responsibilities in case of differences of opinion:
• Joint auditors are required to issue common audit report.

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• However, in case of any disagreement among joint auditors with
regard to the opinion or any matters to be covered by the audit
report, they shall express their opinion in a separate audit
report.
• A joint auditor is not bound by the views of the majority of the

joint auditors regarding the opinion or matters to be covered in
the audit report and shall express opinion formed by the said
joint auditor in separate audit report in case of disagreement.
• In case of separate reports, the audit report(s) issued by the
joint auditor(s) shall make a reference to the separate audit
report(s) issued by the other joint auditor(s). Such reference
shall be made under the heading “Other Matter Paragraph” as
per SA 706.
In the present case, Mr. Z does not agree with the opinion of Mr. X
and Mr. Y, therefore he needs to issue a separate report.
Using the work of an Auditor’s Expert: As per SA 620 “Using the
Work of an Auditor’s Expert”, the auditor shall evaluate the
adequacy of the auditor’s expert’s work for the auditor’s purposes,
including the relevance and reasonableness of that expert’s
findings or conclusions, and their consistency with another audit
evidence.
In the instant case, Mr. X, Mr. Y and Mr. Z, jointly appointed as an
auditor of KRP Ltd., referred their own known Actuaries for
valuation of gratuity scheme. Mr. Y’s referred actuary has
provided the gratuity valuation report, which later on found

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faulty. Further, Mr. Z is not agreed with this report therefore he

submitted a separate audit report specifically for such gratuity
valuation. In such situation, it was duty of Mr. X, Mr. Y and Mr. Z,
before using the gratuity valuation report of Actuary, to ensure the
relevance and reasonableness of assumptions and methods used.
They were also required to examine the relevance, completeness
and accuracy of source data used for such report before
expressing their opinion.
Conclusion: Mr. X and Mr. Y will be held responsible for grossly
negligence and using such faulty report without examining the
adequacy of expert actuary’s work whereas Mr. Z will not be held
liable for the same due to separate opinion expressed by him.
Q.38 ABC & Co. and DEF & Co. Chartered Accountant firms were appointed
as joint auditors of Good Health Care Ltd. for 2018-19. An investigation
was conducted under Companies Act 2013 during March 2020 and
observed gross understatement of Revenue. The revenue aspects were
looked after by DEF & Co, but there was no documentation for the
division of work between the joint auditors. Comment.
Or
Dice Ltd. appointed two CA firms MN & Associates and PQ & Co. as joint
auditors for conducting audit for the year ended 31st March, 2020. In
the course of audit, it has been observed that there is a major
understatement in the value of inventory. The inventory valuation
work was looked after by MN & Associates but there was no

Page 59
documentation for the division of the work between the joint auditors.
Comment on the above situation with regard to responsibilities among
joint auditors. [May 19 – New Syllabus (5 Marks)]
Answer: Responsibilities of Joint Auditor:
• As per SA 299 “Joint Audit of Financial Statements” where joint
auditors are appointed, they should, by mutual discussion,
divide the work among themselves.
• After identification and allocation of work among the joint
auditors, the work allocation document shall be signed by all
the joint auditors and the same shall be communicated to
TCWG of the entity. Documentation of allocation of work helps
in avoiding any dispute or confusion which may arise among
the joint auditors regarding the scope of work to be carried out
by them. Further, the communication of allocation of work to
the entity helps in avoiding any dispute or confusion which
may arise between the entity and the joint auditors.
• In respect of audit work divided among the joint auditors, each
joint auditor is responsible only for the work allocated to him,
whether or not he has prepared a separate report on the work
performed by him.
• However, for the work not divided, all the joint auditors are
jointly and severally responsible.

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• In the present case, though the revenue aspects (inventory
valuation work) were looked after by DEF & Co. (MN &
Associates), but as there is no documentation for division of the
work between them, both the joint auditors will be held
responsible for it.
Conclusion: Both Joint auditors are jointly and severally
responsible.
Note: Conclusion given in Suggested answer of ICAI is different
stating that MN & Associates will be held responsible as inventory
valuation work was looked after by them. Further, there is a
violation of SA 299 as the division of work has not been
documented.
Author’s view: As the work is not documented, responsibility will
be joint and several.
Q.39 P Limited is a limited company and its business activities are divided
into three regions. The company appointed PY & Co., KL & Co., and MK
& Co., Chartered Accountants to conduct a Joint Audit and report on the
financial statements for the Financial year 2019-20. Explain the
relationship among the joint auditors for the audit of the financial
statements for the year 2019-20. [Nov. 15 (5 Marks)]
Or
Write a short note on: Responsibility of Joint Auditors.
Answer: Relationship among Joint Auditors:

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objectives of the auditor as laid down in SA 200.
audit procedures. All the joint auditors shall be jointly and
severally responsible for:
(a) the audit work which is not divided among the joint auditors
(b) decisions taken by all the joint auditors under audit planning
in respect of common audit areas concerning the NTE of the
audit procedures to be performed by each of the joint auditors.
(c) matters which are brought to the notice of the joint auditors
by any one of them and on which there is an agreement among
the joint auditors;
(d) examining that the F.S. of the entity comply with the
requirements of the relevant statutes;
(e) presentation and disclosure of the F.S. as required by the
applicable FRF;
(f) ensuring that the audit report complies with the requirements
of the relevant statutes, the applicable Standards on Auditing
and the other relevant pronouncements issued by ICAI.

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It shall be the responsibility of each joint auditor to determine the
NTE of audit procedures to be applied in relation to the areas of
work allocated to said joint auditor.
It is the individual responsibility of each joint auditor to study and
evaluate the prevailing system

“ICAI of Comments”
Examiner internal control and assessment
Most of the examinees explained the topic correctly but few failed to narrate the
of risk relating
situations to the
in which the areas of work
Joint auditors allocated
are jointly to saidresponsible.
andseverally joint auditor.
Q.40 Your firm is one of the Joint Auditors of FMP Ltd. Under what
circumstances joint auditors are jointly liable for the work in relation
to audit of financial statements? Is there any restriction on a joint
auditor to communicate a dissenting note differing from the majority
opinion of the other joint auditors in the audit report issued under
section 143 of the Companies Act 2013?
[Nov. 18-Old Syllabus (5 Marks)]
Answer: Circumstance in which joint auditors are jointly liable:

Refer Answer of Q. No. 37
Restrictions as to communication of dissenting note:
• SA 299 requires the Joint auditors to issue common audit

report. However, in case of any disagreement among joint
auditors with regard to the opinion or any matters to be
covered by the audit report, they shall express their opinion in a
separate audit report.

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per SA 706.
Q.41 NMN & Co., LLP and ABC & Associates, LLP are the joint statutory
auditors of BHS Ltd. BHS Ltd. is a listed company and has been in
existence for the last 50 years. Since beginning this company was
audited by MQS & Associates but due to audit rotation, the company
had to bring in new auditors. Considering the size of the company, two
auditors were appointed as joint auditors. Since the company is new to
these auditors and the concept of joint auditors to whom audit work
has been divided, management had a discussion and understood that
each joint auditor is responsible only for the work allocated to him,
whether or not he has prepared a separate report on the work
performed by him. Advise. [MTP-April 19]
Answer: Reporting in case of Joint Auditors:
• SA 299 “Joint Audit of Financial Statements” lays down the
principles for effective conduct of joint audit to achieve the
overall objectives of the auditor as laid down in SA 200.
• SA 299 requires the Joint auditors to issue common audit
report. However, in case of any disagreement among joint
auditors with regard to the opinion or any matters to be

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covered by the audit report, they shall express their opinion in a
separate audit report.
• A joint auditor is not bound by the views of the majority of the joint
auditors regarding the opinion or matters to be covered in the
audit report and shall express opinion formed by the said joint
auditor in separate audit report in case of disagreement.
• In case of separate reports, the audit report(s) issued by the joint
auditor(s) shall make a reference to the separate audit report(s)
issued by the other joint auditor(s). Such reference shall be made
under the heading “Other Matter Paragraph” as per SA 706.
Review of work by other joint auditor:
• Each joint auditor is entitled to assume that the other joint auditors
have carried out their part of the audit work and the work has
actually been performed in accordance with the SAs.
• It is not necessary for a joint auditor to review the work performed
by other joint auditors or perform any tests in order to ascertain
whether the work has actually been performed in such a manner.
• Each joint auditor is entitled to assume that the other joint auditors
have brought to said joint auditor’s notice any departure from
applicable FRF or significant observations that are relevant to their
responsibilities noticed in the course of the audit.

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• Before finalizing audit report, the joint auditors shall discuss and
communicate with each other their respective conclusions that
would form the content of the audit report.
Q.42 Excellent Bank Ltd. is a Public Limited Company. The said Bank has
various branches all over India. The Bank appoints 3 Joint Auditors for
the financial year ending 31/03/2019. All the 3 Joint Auditors divide
the work with mutual consent. Verification of Consolidation, however,
remained undivided. All branches and zones were divided amongst the
3 Joint Auditors. During audit of zones, CA. Z, one of the joint auditors
expressed a concern about internal control in one of the large
corporate branches situated in his zone. The irregularity was not
reported in the final accounts as the other 2 Joint Auditors were not in
favour of reporting and decision of not reporting the same was taken
on the basis of majority. Subsequently, fraud has been detected in the
said branch which was audited by CA. Z.
The Bank seeks your advice about the responsibility of the 3 Joint
Auditors in the above situation. [Nov. 19 – Old Syllabus (5 Marks)]
Answer: Responsibilities of Joint auditors:
objectives of the auditor as laid down in SA 200. As per SA 299,
where joint auditors are appointed, they should, by mutual
discussion, divide the work among themselves.

Page 66

audit procedures. On the other hand, all the joint auditors shall be
jointly and severally responsible for:
(a) the audit work which is not divided among the joint auditors
(b) matters which are brought to the notice of the joint auditors by
any one of them and on which there is an agreement among
the joint auditors.
In the present case, all the 3 Joint Auditors divide the work with
mutual consent, except for the verification of consolidation, which
remained undivided. Hence, in accordance with SA 299, all the
joint auditors are responsible for the same.
Reporting Responsibilities in case of differences of opinion:
• Joint auditors are required to issue common audit report.
• However, in case of any disagreement among joint auditors with

regard to the opinion or any matters to be covered by the audit
report, they shall express their opinion in a separate audit
report.


Page 67
per SA 706.
In the present case, CA. Z, one of the joint auditors expressed a
concern about internal control in one of the large corporate
branches situated in his zone. The irregularity was not reported in
the final accounts as the other 2 Joint Auditors were not in favour
of reporting and decision of not reporting the same was taken on
the basis of majority. Subsequently, fraud has been detected in the
said branch which was audited by CA. Z.
Conclusion: Mr. Z was required to issue a separate report. He was
not bound by the views of other joint auditors. Mr. Z will be held
responsible for non-reporting of the matter.
Note: Alternatively, it may be concluded that all the 3 joint
auditors will be held responsible for the fraud detected in the
branch audited by CA Z, as decision for not reporting the
irregularity observed was taken on majority basis.
1.11 - SA 300 “Planning an Audit of Financial Statements”
Q.42 Comment on the following: Auditor shall establish an overall strategy
that sets the scope, timing and direction of the audit, and that guides
the development of the audit plan”.

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Answer: Establishment of Audit Strategy:

(a) SA 300 “Planning an Audit of Financial Statements” requires
that the auditor shall establish an overall audit strategy that
sets the scope, timing and direction of the audit, and that
guides the development of the audit plan.
(b) In establishing the overall audit strategy, the auditor shall:
• Identify the characteristics of the engagement that define
its scope;
• Ascertain the reporting objectives of the engagement to
plan the timing of the audit and the nature of the
communications required;
• Consider the factors that are significant in directing the
engagement team’s efforts;
• Consider the results of preliminary engagement activities
and, where applicable, whether knowledge gained on other
engagements performed by the engagement partner for the
entity is relevant; and
• Ascertain the NTE of procedures necessary to perform.
Q.43 Briefly discuss the following statements in view of SA 300 “Planning an
Audit of Financial Statements”:
(a) For an initial audit, the auditor may need to expand the planning
activities.
(b) Audit planning is not a discrete phase but a continuous phase.
Answer: (a) Need for expansion of Planning Activities in case of Initial
Audit:

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As per SA 300 “Planning and Audit of Financial Statements”

purpose and objective of planning the audit are the same
whether the audit is an initial or recurring engagement.
However, for an initial audit, the auditor may need to expand
the planning activities because the auditor does not ordinarily
have the previous experience with the entity.
For initial audits, additional matters the auditor may consider
in establishing the overall audit strategy and audit plan
include the following:
• Unless prohibited by law or regulation, arrangements to be

made with the predecessor auditor, for example, to review
his working papers.
• Any major issues (including the application of accounting
principles or of auditing and reporting standards) discussed
with management in connection with the initial selection as
auditor, the communication of these matters to TCWG and
how these matters affect the overall audit strategy and audit
plan.
• The audit procedures necessary to obtain SAAE regarding
opening balances as prescribed by SA 510 “Initial
Engagements–Opening Balances”.
• Other procedures required by the firm’s system of quality
control for initial audit engagements (for example, review of
overall audit strategy by senior partner prior to
commencing significant audit procedures or to review
reports prior to their issuance).

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(b) Audit Planning – A continuous process:
Planning is not a discrete phase of an audit but rather a

continuous process. It often begins shortly after (or in
connection with) the completion of the previous audit and
continues until the completion of the current audit
engagement.
Planning, however, includes consideration of the timing of
certain activities and audit procedures that need to be
completed prior to the performance of further audit
procedures. For example, planning includes the need to
consider, prior to the auditor’s identification and assessment
of the risks of material misstatement, such matters as:
1. The analytical procedures to be applied as risk assessment

procedures.
2. Obtaining a general understanding of the legal and
regulatory framework applicable to the entity and how the
entity is complying with that framework.
3. The determination of materiality.
4. The involvement of experts.
5. The performance of other risk assessment procedures.
Q.44 “The auditor shall document (i) The overall audit strategy; (ii) The
audit plan; and (iii) Any significant changes made during the audit
engagement to the overall audit strategy or the audit plan, and the
reasons for such changes.” Explain.

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Answer: Documentation of Audit Strategy and Audit Plan:
• SA 300 “Planning an Audit of Financial Statements” requires
that the auditor shall establish an overall audit strategy that
sets the scope, timing and direction of the audit, and that guides
the development of the audit plan. Accordingly, auditor shall
document:
(a) The overall audit strategy;
(b) The audit plan; and
(c) Any significant changes made during the audit engagement
to the overall audit strategy or the audit plan, and the
reasons for such changes.
• Documentation of the overall audit strategy is a record of the
key decisions considered necessary to properly plan the audit
and to communicate significant matters to the engagement
team.
• Documentation of the audit plan is a record of the planned
nature, timing and extent of Risk Assessment procedures and
Further Audit Procedures at the assertion level in response to
the assessed risks. It also serves as a record of the proper
planning of the audit procedures that can be reviewed and
approved prior to their performance.

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• Record of the significant changes to the overall audit strategy
and the audit plan, and resulting changes to the planned NTE of
audit procedures, explains why the significant changes were
made, and the overall strategy and audit plan finally adopted
for the audit.
1.12 - SA 315 “Identifying and Assessing the Risk of Material Misstatements
through Understanding the Entity and its Environment”
Q.45 What are the points to be remembered while evaluating the
knowledge of the business in the conduct of an audit?
[May 09 (8 Marks)]
Or
What are the broad matters to be considered while obtaining
knowledge of business for a new audit engagement of a manufacturing
concern? [May 10 (4 Marks)]
Answer: Obtaining an understanding of the entity and its
environment:
As per SA 315 “Identifying and Assessing the Risk of Material
Misstatements through understanding the entity and its
environment” auditor is required to obtain an understating of
following as a part of risk assessment procedures:
(a) Industry, regulatory, and other external factors including
applicable financial reporting framework.

Page 73
(b) The nature of the entity, including:
• its operations;
• its ownership and governance structures;
• the types of investments that the entity is making and
plan to make; &
• the way that the entity is structured and how it is
financed;
(c) The entity’s selection and application of accounting policies,
including the reasons for changes thereto.
(d) The entity’s objectives and strategies, and those related
business risks that may result in risks of material
misstatement.
(e) The measurement and review of the entity’s financial
performance.
The auditor shall also obtain an understanding of internal
controls relevant for an audit.
Q.46 Explain the concept of Audit Risk at the level of Financial Statements.
Answer: Audit Risk at the level of financial statements:
• SA 315 “Identifying and Assessing Risk of Material
Misstatements through Understanding the Entity and its
Environment” requires the auditor to identify and assess the
risks of material misstatement, whether due to fraud or error,
at the financial statement and assertion levels.

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• Audit risk at the level of financial statements refers to risks of
material misstatement that relate pervasively to the financial
statements as a whole and potentially affect many assertions.
• Risks at the financial statement level may derive in particular
from deficient control environment (although these risks may
also relate to other factors, such as declining economic
conditions). For example, deficiencies such as management’s
lack of competence may have a more pervasive effect on the F.S.
and may require an overall response by the auditor.
• The auditor’s understanding of internal control may raise
doubts about the auditability of an entity’s financial statements.
For example:
(i) Concerns about the integrity of the entity’s management
may be so serious as to cause the auditor to conclude that
the risk of management misrepresentation in the financial
statements is such that an audit cannot be conducted.
(ii) Concerns about the condition and reliability of an entity’s
records may cause the auditor to conclude that it is unlikely
that SAAE will be available to support an unqualified
opinion on the F.S.

Page 75
Q.47 In the course of audit of PB Ltd., You observe that there is a likelihood
of misstatement in the account balances and disclosures in the
financial statements. What should be your considerations as an
auditor for “Assessing the Risk of Material Misstatements”?
Answer: Considerations for assessing the Risk of Material
Misstatements:
• As per SA 315, the auditor shall identify and assess the risks
of material misstatement at:
(a) the financial statement level; and
(b) the assertion level for classes of transactions, account
balances, and disclosures;
to provide a basis for designing and performing further
audit procedures. 26.
• For this purpose, the auditor shall:
(a) Identify risks throughout the process of obtaining an
understanding of the entity and its environment,

Page 76
including relevant controls that relate to the risks, and by
considering the classes of transactions, account balances,
and disclosures in the financial statements;
(b) Assess the identified risks, and evaluate whether they
relate more pervasively to the financial statements as a
whole and potentially affect many assertions;
(c) Relate the identified risks to what can go wrong at the
assertion level, taking account of relevant controls that
the auditor intends to test; and
(d) Consider the likelihood of misstatement, including the
possibility of multiple misstatements, and whether the
potential misstatement is of a magnitude that could result
in a material misstatement.
Examinees correctly quoted concept covered under SA 315 but only few explained what
is to be considered by the auditor in this regard.
Q.48 The identified risks are assessed by auditor as to its significance on
account of its likely impact, by way of material misstatement
appearing in financial statements or by affecting internal control
system. What may be the points of indication that may direct the
Auditor to judge that the risks identified may be significant?
[Nov. 18-New Syllabus (4 Marks)]

Page 77
Answer: Points of indication that direct the Auditor to judge that the
risks identified may be significant:
• As part of the risk assessment, the auditor shall determine
whether any of the risks identified are, in the auditor’s
judgment, a significant risk. In exercising this judgment, the
auditor shall exclude the effects of identified controls related to
the risk.
• In exercising judgment as to which risks are significant risks,
the auditor shall consider at least the following:
(a) Whether the risk is a risk of fraud;
(b) Whether the risk is related to recent significant economic,
accounting, or other developments like changes in
regulatory environment, etc., and, therefore, requires
specific attention;
(c) The complexity of transactions;
(d) Whether the risk involves significant transactions with
related parties;

Page 78
(e) The degree of subjectivity in the measurement of financial
information related to the risk, especially those
measurements involving a wide range of measurement
uncertainty; and
(f) Whether the risk involves significant transactions that are
outside the normal course of business for the entity, or that
otherwise appear to be unusual.
Majority of the examinees have no idea about the topic.
Q.49 Z Ltd. has its entire operations including accounting computerised. As
the audit partner you are concerned about inherent and control risk
for material financial statement assertions. What could be the areas
you look forward for deficiencies and risk identification.
[May 11 (4 Marks)]
Or
Write short note on: Causes of risk at material misstatement in CIS
Environment. [May 14 (4 Marks)]
Answer: Risk Assessment in CIS Environment:

SA 315 “Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and its
Environment”, requires the auditor to make an assessment of
inherent and control risk for material financial statement
assertions. In a CIS environment, auditor should look into below
mentioned area for risk identification:

Page 79
(i) Program Development and maintenance.
(ii) System software support.
(iii) Operations including processing of data.
(iv) Physical CIS security.
(v) Control over access to specialized utility program.

Majority of the candidates have wrongly referred to all types of controls in a
computerized environment. Some of them have wrongly referred to various types of
risks.
Q.50 One of the components of an adequate system of internal control is

entity's risk assessment process. Risk relevant to reliable financial
reporting include external and internal events, transactions or
circumstances that may occur and adversely affect an entity's ability
to initiate, record, process and report financial data consistent with
the assertions of management in the financial statements.
In view of the above. Briefly state any six circumstances of entity's risk
assessment Process component under which risks may arise or
change.
Or
The Entity’s Risk Assessment Process includes how management
identifies business risks relevant to the preparation of financial
statements in accordance with the entity’s applicable financial
reporting framework, estimates their significance, assesses the
likelihood of occurrence and decides upon actions to respond to and
manage them and the results thereof. Elucidate the circumstances in
which risks can arise or change.

Page 80
Answer: Circumstances of Entity’s Risk Assessment Process
Component under which risk may arise:
As per SA 315 “Identifying and Assessing the Risks of Material
Environment” the entity’s risk assessment process forms the
basis for how management determines the risks to be managed.
If that process is appropriate to the circumstances, including
the nature, size and complexity of the entity, it assists the
auditor in identifying RMM. Risk can arise or change due to
below mentioned circumstances:
1. Changes in operating environment: Changes in the
regulatory or operating environment can result in changes
in competitive pressures and significantly different risks.
2. New personnel: New personnel may have a different focus
on or understanding of internal control.
3. New or revamped information systems: Significant and
rapid changes in information systems can change the risk
relating to internal control.
4. Rapid growth. Significant and rapid expansion of
operations can strain controls and increase the risk of a
breakdown in controls.
5. New technology: Incorporating new technologies into
production processes or information systems may change
the risk associated with internal control.

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6. New business models, products, or activities: Entering

into business areas or transactions with which an entity has
little experience may introduce new risks associated with
internal control.
7. Corporate restructurings: Restructurings may be
accompanied by staff reductions and changes in supervision
and segregation of duties that may change the risk
associated with internal control.
8. Expanded foreign operations: The expansion or
acquisition of foreign operations carries new and often
unique risks that may affect internal control, for example,
additional or changed risks from foreign currency
transactions.
9. New accounting pronouncements: Adoption of new
accounting principles or changing accounting principles
may affect risks in preparing financial statements.
Q.51 IT systems also pose specific risks to an entity's internal control? What
are those risks? [May 10 (4 Marks)]
Or
Enumerate the specific risks that Information Technology (IT) systems
can pose to an entity’s internal control. [Nov. 17 (5 Marks)]
Answer: Risk to Internal Control imposed by IT System:

As per SA 315 “Identifying and Assessing the Risks of Material
Environment”, IT system also poses specific risks to an entity’s
Internal Control. These risks are:

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(a) Reliance on systems or programs that are inaccurately
processing data, processing inaccurate data or both.
(b) Unauthorised access to data that may result in destruction of
data or improper changes to data, including the recording of
unauthorized or non-existent transactions, or inaccurate
recording of transactions. Particular risk may arise when
multiple users access a common database.
(c) The possibility of IT personnel gaining access beyond those
necessary to perform their assigned duties thereby breaking
down segregation of duties.
(d) Unauthorised changes to data in Master files
(e) Unauthorised changes to systems or programs.
(f) Failure to make necessary changes to systems or programs.
(g) In appropriate manual intervention
(h) Potential loss of data or inability to access data as required.

Many Examinees have not enumerated properly the specific risks that IT system poses
to an entity’s Internal Control. Only few examinees made a better presentation of the
topic. Some examinees wrongly explained the various types of audit risks namely
Inherent Risk, Control Risk and Detection Risk while some other examinees wrote
general answers like lack of audit trail, segregation of duties, safeguarding of assets,
backup, storage etc.
1.13 - SA 320 “Materiality in Planning and Performing an Audit”
Q.52 Mr. X was appointed as the auditor of M/s Easygo Ltd. and intends to
apply the concept of materiality for the financial statements as a
whole. Please guide him as to the factors that may affect the

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identification of an appropriate benchmark for this purpose.
[Nov. 13 (4 Marks), MTP-Aug. 18]
Answer: Use of benchmark in determining Materiality:

SA 320 “Materiality in Planning and Performing an Audit”
prescribes the use of Benchmarks in Determining Materiality for
the Financial Statements as a Whole. Accordingly determining
materiality involves the exercise of professional judgment. A
percentage is often applied to a chosen benchmark as a starting
point in determining materiality for the financial statements as a
whole.
Factors that may affect the identification of an appropriate
benchmark include the following:
(i) The elements of the financial statements (for example, assets,

liabilities, equity, revenue, expenses);
(ii) Whether there are items on which the attention of the users of
the particular entity’s financial statements tends to be focused
(for example, for the purpose of evaluating financial
performance users may tend to focus on profit, revenue or net
assets);
(iii)The nature of the entity, where the entity is at in its life cycle,
and the industry and economic environment in which the
entity operates;
(iv) The entity’s ownership structure and the way it is financed
(for example, if an entity is financed solely by debt rather than
equity, users may put more emphasis on assets, and claims on
them, than on the entity’s earnings); and

Page 84
(v) The relative volatility of the benchmark.

Most of the candidates have no idea of the relevant standard and tried to answer the
question based on post audit situation rather than pre-audit planning as required in
thequestion. Instead of discussing the factors affecting the identification of
appropriatebenchmark to apply the concept of materiality, candidates discussed
about the concept ofmateriality, its uses and importance of this concept for audit.
Q.53 As an auditor of RST Ltd. Mr. P applied the concept of materiality for
the financial statements as a whole. On the basis of obtaining
additional information of significant contractual arrangements that
draw attention to a particular aspect of a company’s business, he
wants to re-evaluate the materiality concept. Please guide him.
[May 15 (5 Marks)]
Or
Y & Co., Chartered Accountants have come across in the course of audit
of a company that certain machinery had been imported for
production of new product. Although the Auditors have applied the
concept of materiality for the financial statements as a whole, they
now want to re-evaluate the materiality concept for this transaction
involving foreign exchange. Give your views in this regard.
[May 18 – New Syllabus (5 Marks)]
Answer: Re-evaluation of the Materiality Concept:
• SA 320 “Materiality in Planning and Performing an Audit”,
requires the auditor to determine materiality for the financial
statement as a whole, while establishing the overall audit
strategy.

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• If, in the specific circumstances of the entity, there is one or

more particular classes of transactions, account balances or
disclosures for which misstatements of lesser amounts than the
materiality for the financial statements as a whole could
reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements, the auditor
shall also determine the materiality level or levels to be applied
to those particular classes of transactions, account balances or
disclosures.
• The auditor shall revise materiality for the financial statements
as a whole and if applicable the materiality levels for particular
classes of transactions, account balances or disclosures, in the
event of becoming aware of information during the audit that
would have caused the auditor to have determined a different
amount (or amounts) initially.
• If the auditor concludes a lower materiality for the same, then
he should consider the fact that whether it is necessary to
revise performance materiality and whether the nature, timing
and extent of the further audit procedures remain appropriate.
• In the instant case,auditor has applied the concept of
materiality for the financial statements as a whole. But he wants
to re-evaluate the materiality concept, on the basis of additional
information of significant contractual arrangements which
draws attention to a particular aspect of the company’s
business.

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Conclusion: Auditor can re-evaluate the materiality concepts
after considering the necessity of such revision.

Many candidates erred by writinganswers based on SA 330 whereas some of them
mentioned SA 320 correctly but failed toexplain the required answer.
1.14 - SA 330 “Auditor’s Responses to Assessed Risks”
Q.54 In the course of audit of Z Ltd, its auditor wants to rely on audit
evidence obtained in previous audit in respect of effectiveness of
internal controls instead of retesting the same during the current
audit. As an advisor to the auditor kindly caution him about the factors
that may warrant a re-test of controls.
[May 13 (4 Marks), RTP-Nov. 18, MTP-Oct.19]
Answer: Factors warranting re-test of controls:
As per SA 330 on “The Auditor’s Responses to Assessed Risks”, if
the auditor plans to use audit evidence from a previous audit
about the operating effectiveness of specific controls, he shall
establish the continuing relevance of that evidence by obtaining
audit evidence about whether significant changes in those
controls have occurred subsequent to the previous audit.
The auditor’s decision on whether to rely on audit evidence
obtained in previous audits for control is a matter of professional
judgment.
Factors that may warrant a re-test of controls are-
1. A deficient control environment.

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2. Deficient monitoring of controls.
3. A significant manual element to the relevant controls.
4. Personnel changes that significantly affect the application of
the control.
5. Changing circumstances that indicate the need for changes in
the control.
6. Deficient general IT-controls.

Many candidates failed to understand the requirement of the question and discussed
mainly the procedure of internal control and reliance on previous auditor rather than
the factors that may warrant a re-test of controls.
Q.55 While carrying out the statutory audit of a large entity, what are the
substantive procedures to be performed to assess the risk of material
misstatement? [Nov. 12 (8 Marks)]
Answer: Substantive Procedures to be performed to assess the risk of
material misstatement:
• SA 330, “The Auditor’s Response to Assessed Risk”, defines
substantive procedures as an audit procedure designed to
detect material misstatements at the assertion level. They
comprise tests of details and substantive analytical procedures.
• Test of Details: Irrespective of the assessed risks of material
misstatement, the auditor shall design and perform
substantive procedures for each material class of transactions,
account balance, and disclosure. This requirement reflects the

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facts that: (i) the auditor’s assessment of risk is judgmental and
so may not identify all risks of material misstatement; and (ii)
there are inherent limitations to internal control, including
management override.
• Substantive Analytical Procedure: Substantive analytical
procedures are generally more applicable to large volumes of
transactions that tend to be predictable over time. SA 520,
“Analytical Procedures” establishes requirements and provides
guidance on the application of analytical procedures during an
audit.
• Depending on the circumstances, the auditor may determine
that:
1. Performing only substantive analytical procedures will be
sufficient to reduce audit risk to an acceptably low level. For
example, where the auditor’s assessment of risk is
supported by audit evidence from tests of controls.
2. Only tests of details are appropriate.
3. A combination of substantive analytical procedures and
tests of details are most responsive to the assessed risks.
Q.56 While commencing the statutory audit of B Company Limited, the
auditor undertook the risk assessment and found that the detection
risk relating to certain class of transactions cannot be reduced to
acceptance level. Explain. [May 17 (5 Marks)]

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Answer: Assessment of Risk and Acceptable Level:
• SA 315 “Identifying and Assessing the Risk of Material
Misstatement Through Understanding the Entity and its
Environment” and SA 330 “The Auditor’s Responses to
Assessed Risks” establishes standards on the procedures to be
followed to obtain an understanding of the accounting and
internal control systems and on audit risk and its components.
• SA 315 and SA 330 require that the auditor should use
professional judgement to assess risk of material misstatement
and to design audit procedures to ensure that it is reduced to an
acceptably low level.
• Risk of Material Misstatements comprises of Inherent risk and
Control Risk. “Detection risk” is the risk that an auditor’s
substantive procedures will not detect a misstatement that
exists in an account balance or class of transactions that could
be material.
• The higher the risk of material misstatement, the more audit
evidence the auditor should obtain from the performance of
substantive procedures. When both inherent and control risks
are assessed as high, the auditor needs to consider whether
substantive procedures can provide sufficient appropriate audit
evidence to reduce detection risk, and therefore audit risk, to an
acceptably low level.

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• The auditor should use his professional judgement to assess
audit risk and to design audit procedures to ensure that it is
reduced to an acceptably low level. If it cannot be reduced to an
acceptable level, the auditor should express a qualified opinion
or a disclaimer of opinion as may be appropriate.
Q.57 While commencing the statutory audit of ABC Company Limited, what
should be the considerations of the auditor to assess Risk of Material
Misstatement and his response to such risks? [Nov. 14 (4 Marks)]
Answer: Considerations of Auditor for Assessing the Risk of Material
Misstatement:
SA 315 “Identifying and Assessing the Risk of Material
Misstatement through understanding the Entity and its
Environment”, requires the auditor to identify and assess the risks
of material misstatement at the financial statement level; and the
assertion level for classes of transactions, account balances, and
disclosures to provide a basis for designing and performing
further audit procedures. For this purpose, the auditor shall:
(i) Identify risks throughout the process of obtaining an
understanding of the entity and its environment, including
relevant controls;
(ii) Assess and evaluate the identified risks;
(iii) Relate the identified risks to what can go wrong at the
assertion level; and
(iv) Consider the likelihood of misstatement.

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Auditor’s Responses to the Assessed Risk of Material
Misstatement:
As per SA 330 “The Auditor’s Responses to Assessed Risks”, the
auditor shall design and implement overall responses to address
the assessed risks of material misstatement. In designing the audit
procedures to be performed, the auditor shall:
(i) Consider the reasons for the assessment given to the risk of
material misstatement at the assertion level for each class of
transactions, account balance, and disclosure; and
(ii) Obtain more persuasive audit evidence for the auditor’s
assessment of risk.

Many candidates failed to mention how the auditor shall identify and assess the risks
of material misstatement. Most of the candidates failed to discuss SA 330 on Auditor’s
response in assessing the risk of material misstatement. Majority of the candidates
discussed either SA 315 or SA 330 but not both.
Q.58 “External confirmation procedures frequently are relevant when
addressing assertions associated with account balances and their
elements but need not be restricted to these items.” Explain.
Or
Point out any eight areas where external confirmation used as an audit
evidence.
Answer: Areas where external confirmations may be used:

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As per SA 330 “Responses to Assessed Risks” External
confirmation procedures frequently are relevant when addressing
assertions associated with account balances and their elements,
but need not be restricted to these items.
For example, the auditor may request external confirmation of the
terms of agreements, contracts, or transactions between an entity
and other parties.
Other situations where external confirmation procedures may
provide relevant audit evidence in responding to assessed risks of
material misstatement include:
1. Bank balances and other information relevant to banking
relationships.
2. Accounts receivable balances and terms.
3. Inventories held by third parties at bonded warehouses for
processing or on consignment.
4. Property title deeds held by lawyers or financiers for safe
custody or as security.
5. Investments held for safekeeping by third parties or purchased
from stockbrokers but not delivered at the balance sheet date.
6. Amounts due to lenders, including relevant terms of
repayment and restrictive covenants.
7. Accounts payable balances and terms.

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Q.59 State the factors that may assist the auditor in determining whether
external confirmation procedures are to be performed as substantive
audit procedures.
Answer: Factors that may assist in determining use of external
confirmations as substantive audit procedures:
As per SA 330 “Responses to Assessed Risks” factors that may
assist the auditor in determining whether external confirmation
procedures are to be External Confirmations performed as
substantive audit procedures include:
1. The confirming party’s knowledge of the subject matter –
responses may be more reliable if provided by a person at the
confirming party who has the requisite knowledge about the
information being confirmed.
2. The ability or willingness of the intended confirming party to
respond – for example, the confirming party:
• May not accept responsibility for responding to a
confirmation request;
• May consider responding too costly or time consuming;
• May have concerns about the potential legal liability
resulting from responding;
• May account for transactions in different currencies; or
• May operate in an environment where responding to
confirmation requests is not a significant aspect of day-to-
day operations.

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In such situations, confirming parties may not respond, may
respond in a casual manner or may attempt to restrict the
reliance placed on the response.
3. The objectivity of the intended confirming party – if the
confirming party is a related party of the entity, responses to
confirmation requests may be less reliable.
1.15 - SA 402 “Audit Considerations in an Entity using Service Organisation”

Q.1 Durafone Mobile Co. Ltd. have pan India presence and market leader
in mobile operation. It has outsourced all its revenue operation
including accounting functions to Set Solutions (P) Ltd. As an Auditor
of the mobile company, enumerate the factors to be taken into
consideration related to its financial reporting.
[May 18 – Old Syllabus (5 Marks)]
Answer: Factors to be taken into consideration related to financial
reporting in case of user entities using services of Service
Organisation:
• SA 402 “Audit Considerations relating to an Entity Using a
Service Organisation” deals with the user auditor’s
responsibility to obtain sufficient appropriate audit evidence
when a user entity uses the services of one or more service
organisations.

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• Services provided by a service organisation are relevant to the
audit of a user entity’s financial statements when those
services, and the controls over them, are part of the user
entity’s information system, including related business
processes, relevant to financial reporting.
• Although most controls at the service organisation are likely to
relate to financial reporting, there may be other controls that
may also be relevant to the audit, such as controls over the
safeguarding of assets.
• A service organisation’s services are part of a user entity’s
information system, including related business processes,
relevant to financial reporting if these services affect any of the
following:
(a) The classes of transactions in the user entity’s operations
that are significant to the user entity’s financial statements;
(b) The procedures, within both information technology (IT)
and manual systems, by which the user entity’s transactions
are initiated, recorded, processed, corrected as necessary,
transferred to the general ledger and reported in the
financial statements;

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(c) The related accounting records, either in electronic or
manual form, supporting information and specific accounts
in the user entity’s financial statements that are used to
initiate, record, process and report the user entity’s
transactions; this includes the correction of incorrect
information and how information is transferred to the
general ledger;
(d) How the user entity’s information system captures events
and conditions, other than transactions, that are significant
to the financial statements;
(e) The financial reporting process used to prepare the user
entity’s financial statements, including significant
accounting estimates and disclosures; and
(f) Controls surrounding journal entries, including non-
standard journal entries used to record non-recurring,
unusual transactions or adjustments.
Q.60 “As per SA 402, the user auditor shall obtain an understanding of how
user entity uses the services of a service organization in the user
entity operations” Explain the various matters of which understanding
is required.
Or

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A Company gets its accounting data processed by a third party to
achieve cost reduction. As a Statutory Auditor of such a company, what
are the additional precautions/checks that you would consider for
conduct of the audit?
Or
In the course of the audit of R Ltd., the audit manager of ABC & Co.
observed that R Ltd. has outsourced certain activities to an
outsourcing agency. As the engagement partner guide the audit
manager in the assessment of services provided by the outsourcing
agency in relation to the audit. [May 11 (4 Marks)]
Or
G Ltd. is a mobile phone operating company. Barring the marketing
function, it had outsourced the entire operations like maintenance of
mobile infrastructure, customer billing, payroll, accounting functions,
etc. Assist the auditor of G Ltd. as to how he can obtain an
understanding of how G Ltd. uses the services of the outsourced
agency in its operations.
[Nov. 13 (5 Marks), MTP-Oct. 18, RTP-Nov. 18, MTP-Oct. 19]
Answer: Matters of which understanding is required by user auditor

w.r.t. services of a services organization:
A client may use a service organisation such as one that executes
transactions and maintains related accounts or records
transactions and processes related data. If a client uses a service
organisation, certain policies, procedures and records maintained

Page 98
by the service organisation might be relevant to the audit of the

financial statements of the client. Consequently, the auditor would
consider the nature and extent of activities undertaken by service
organisations so as to determine whether those activities are
relevant to the audit and, if so, to assess their effect on audit risk.
SA 402 on “Audit Considerations relating to an Entity Using a
Service Organisation” deals with the user auditor’s responsibility
to obtain sufficient appropriate audit evidence when a user entity
uses the services of one or more service organisations.
Accordingly, the user auditor is required to obtain an
understanding of how user entity uses the services of a service
organization in the user entity operation, including:
1. Nature of service provided by the service organization and the
significance of those services to the user entity.
2. The nature and materiality of the transactions processed or
financial reporting processes affected by service organizations.
3. The degree of interaction between activities of service
organizations and those of the user entity.
4. The nature of relationship between user entity and the service
organization.

Candidates gave only basic idea of gathering knowledge of the outsourced agency but
failed to answer specifically as to when obtaining an understanding of the user entity
inaccordance with SA 315, the user auditor shall obtain an understanding of how a
user entityuses the services of a service organization in the user entity’s operations.
Some candidateshave written general audit procedure instead of explaining in terms
of SA 402. A fewcandidates mentioned irrelevant points like visiting the Service
Provider’s premises and thendo the audit/enquiry.

Page 99
Q.61 In the course of audit of Raja and Rank Ltd., the audit manager of
Sharma & Co. observed that Raja and Rank Ltd. has outsourced certain
activities to an outsourcing agency.
(a) As the engagement partner, guide the audit manager in the
assessment of services provided by the outsourcing agency in
relation to the audit.
(b) Discuss the procedure to be applied in case the user auditor is
unable to obtain a sufficient understanding from the user entity?
Answer:
(a) Assessment of services provided by outsourcing agency:
(b) Procedure to be followed if user auditor is unable to
obtain sufficient understanding from user entity:
• The user auditor shall determine whether a sufficient
understanding of nature and significance of services
provided by service organization and their effect on the
user entity internal control relevant to the audit has been
obtained, to provide basis for identification and assessment
of risk of Material Misstatement.
• If user auditor is unable to obtain a sufficient
understanding from the user entity, the user auditor shall
obtain that understanding from one or more of following
procedures:
(a) Obtaining a Type 1 or Type 2 Report, if available.

Page 100
(b) Contacting the service organization, through the user
entity, to obtain the sufficient information.
(c) Visiting the service organization.
(d) Using another auditor to perform procedures that will
provide the necessary information about the relevant
controls at the service organization.
Q.62 When a sub-service organization performs services for a service
organization, there are two alternative methods of presenting the
description of controls. The service organization determines which
method will be used. As a user auditor what information would you
obtain about controls at a sub-service organization?
[May 15 (5 Marks)]
Answer: Information to be obtained w.r.t. controls at a sub-service
organisation:
• SA 402 on “Audit Considerations relating to an Entity Using a
Service Organisation” deals with the user auditor’s
responsibility to obtain sufficient appropriate audit evidence
when a user entity uses the services of one or more service
organisations, which in turn may use a sub-service organisation
to provide some of the services provided to a user entity that
are part of the user entity’s information system relevant to
financial reporting.

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• If a service organisation uses a subservice organisation, the
service auditor’s report may either include or exclude the
subservice organisation’s relevant control objectives and
related controls in the service organisation’s description of its
system and in the scope of the service auditor’s engagement.
These two methods of reporting are known as the inclusive
method and the carve-out method, respectively.
• If the Type 1 or Type 2 report excludes the controls at a
subservice organisation, and the services provided by the
subservice organisation are relevant to the audit of the user
entity’s financial statements, the user auditor is required to
apply the requirements of this SA in respect of the subservice
organisation and accordingly obtain an understanding of the
following:
1. Nature of service provided by the sub-service organization
and the significance of those services to the user entity.
2. The nature and materiality of the transactions processed or
financial reporting processes affected by sub-service
organizations.
3. The degree of interaction between activities of sub-service
organizations and those of the user entity.
4. The nature of relationship between user entity and the sub-
service organization.

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• The nature and extent of work to be performed by the user
auditor regarding the services provided by a subservice
organisation depend on the nature and significance of those
services to the user entity and the relevance of those services to
the audit.
Many candidates referred to SA 402 correctlybut failed to explain the information that
would be obtained by user auditor about controls atsubservice organization.
1.16 - SA 450 “Evaluation of Misstatements identified during the Audit”
Q.63 In the course of audit of T Ltd., the audit team is not sure of the
possible source of misstatements in the financial statements. As the
audit manager identify the sources of misstatements.
[May 11 (4 Marks)]
Or
In audit plan for T Ltd, as the audit partner you want to highlight the
sources of misstatements, arising from other than fraud, to your audit
team and caution them. Identify the sources of misstatements.
[May 13 (4 Marks), RTP-Nov. 18]
Answer: Sources of Misstatement:
SA 450 “Evaluation of Misstatements identified during the Audit”,
defines the term misstatement as a difference between the
amounts, classification, presentation, or disclosure of a reported
financial statement item and the amount, classification,
presentation, or disclosure that is required for the item to be in

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accordance with the applicable financial reporting framework.
Accordingly, misstatement may cause due to following:
(i) An inaccuracy in gathering or processing data from which the
financial statements are prepared;
(ii) An omission of an amount or disclosure;
(iii) An incorrect accounting estimate arising from overlooking, or
clear misinterpretation of facts; and
(iv) Judgments of management concerning accounting estimates
that the auditor considers unreasonable or the selection and
application of accounting policies that the auditor considers
inappropriate.

Candidates, in general, mentioned most of the important sources of misstatements
arising from other than fraud but some also wrote about sources of misstatements
arising from fraud, which was not required.
Q.64 Discuss the impact of uncorrected misstatements identified during the
audit and the auditor’s response to the same. [Nov. 14 (4 Marks)]
Or
The auditor of XY & Co. Ltd. has intimated the management that
certain misstatements identified during the course of audit need to be
corrected. As an auditor, discuss the impact of such misstatements in
case the management does not carry out the said corrections.
[Nov. 17 (5 Marks)]

Page 104
Answer: Impact of uncorrected misstatements identified during the
audit:
• SA 450 “Evaluation of Misstatements identified during the
audit” deals with the auditor’s responsibility to evaluate the
effect of identified misstatements on the audit and of
uncorrected misstatements, if any, on the financial statements.
• In accordance with SA 450, the auditor shall determine whether
uncorrected misstatements are material, individually or in
aggregate. In making this determination, the auditor shall
consider the size and nature of the misstatements, both in
relation to particular classes of transactions, account balances
or disclosures and the financial statements as a whole.
• The auditor shall request the management that uncorrected
misstatements be corrected. If management refuses to correct
some or all of the misstatements communicated by the auditor,
the auditor shall obtain an understanding of management’s
reasons for not making the corrections.
• Prior to evaluating the effect of uncorrected misstatements, the
auditor shall reassess materiality determined in accordance
with SA 320, to confirm whether it remains appropriate in the
context of the entity’s actual financial results.
• The auditor shall communicate with TCWG, uncorrected
misstatements and the effect that they, individually or in
aggregate, may have on the opinion in the auditor’s report.

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• The auditor shall request a written representation from
management and, where appropriate, those charged with
governance whether they believe the effects of uncorrected
misstatements are immaterial, individually and in aggregate, to
the financial statements as a whole.

Most of the candidates answered the question in a general manner and failed to explain
SA 450 and correlate with the same.
Q.65 The auditor should take into account the aggregate of all uncorrected
misstatements including those involving estimates in his assessment
of materiality in audit.
Answer: Consideration of uncorrected and unidentified
misstatements:
• SA 320 “Materiality in Planning and Performing an Audit”
deals with the auditor’s responsibility to apply the concept
of materiality in planning and performing an audit of
• SA 450, “Evaluation of Misstatements identified during the
Audit” explains how materiality is applied in evaluating the
uncorrected misstatements, if any, on the financial
statements.
• SA 450 requires that the auditor shall determine whether

the overall audit strategy and audit plan need to be revised if

Page 106
the nature of identified misstatements and the

circumstances of their occurrence indicate that other
misstatements may exist that, when aggregated with
misstatements accumulated during the audit, could be
material or the aggregate of misstatements accumulated
during the audit approaches materiality determined in
accordance with SA 320.
• If the aggregate of misstatements accumulated during the
audit approaches materiality determined in accordance with
SA 320, there may be a greater risk that possible undetected
misstatements, when taken with the aggregate of
misstatements accumulated during the audit, could exceed
the materiality. Undetected misstatements could exist
because of the presence of sampling risk and non-sampling
risk.
• In such a situation, auditor may request management to
examine a class of transactions, account balance or
disclosure in order for management to understand the cause
of a misstatement identified by the auditor, perform
procedures to determine the amount of the actual
misstatement in the class of transactions, account balance or
disclosure, and to make appropriate adjustments to the
financial statements. Such a request may be made, for
example, based on the auditor’s projection of misstatements
identified in an audit sample to the entire population from
which it was drawn.

Page 107
Q.66 While auditing accounts of a public limited company for the year
ended 31st March 2016, an auditor found out an error in the valuation
of inventory, which affects the financial statement materially –
Comment as per standards on auditing.
Answer: Errors in Valuation of Inventories and Auditor’s

Responsibilities:
• SA 450 “Evaluation of Misstatements identified during the

audit” deals with the auditor’s responsibility to evaluate the
uncorrected misstatements, if any, on the financial
statements.
• In accordance with SA 450 auditor should consider

requesting the management to adjust the financial
information or consider extending his audit procedures. If the
management refuses to adjust the financial information and
the results of extended audit procedures do not enable the
auditor to conclude that the aggregate of uncorrected
misstatements is not material, the auditor should express a
qualified or adverse opinion, as appropriate.
Conclusion: In the instant case, the auditor has detected the

material errors affecting the financial statements; the auditor
should communicate his findings to the management on a
timely basis, consider the implications on true and fair view and
also ensure that appropriate disclosures have been made.

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1.17 - SA 500 “Audit Evidence”
Q.67 Comment on the following: Z Ltd. had appointed an outside expert to
assess accrued gratuity liability of the company. Based on the said
report, the company provides Rs. 80 lakhs as gratuity in the financial
statements. [May 09 (4 Marks)]
or
What are the procedures to be followed by a statutory auditor for
verifying the provision for accrued liability for retirement benefits
which is based on a certificate of a reputed actuary?
[May 10 (8 Marks)]
or
Y Ltd. Engaged an actuary to ascertain its employee cost, gratuity and
leave encashment liabilities. As the auditor of Y Ltd. You would like to
use the report of actuary as an audit evidence. How do you evaluate
the work of actuary. [May 11 (8 Marks), May 16 (4 Marks)]
Or
CA. Needle had been appointed as an auditor of M/s Fabric Ltd. in the
course of audit, it had been observed that inventory including work-
in-process had been valued by management by using experts hired by
them. Analyse relevant factors to decide as to whether or not to accept
the findings from the work of management expert in valuation of
inventories. [May 18 – New Syllabus (5 Marks)]

Page 109
Answer: Evaluating the work of Management Expert:
As per SA 500 “Audit Evidence” when information to be used as
audit evidence has been prepared using the work of a
management’s expert, the auditor shall perform the following:
(i) Evaluate the competence, capabilities and objectivity of
that expert:
For this purpose, auditor may consider his qualification,
membership of a professional body or industrial association
license to practice etc.
(ii) Obtain an understanding of the work of that expert:
It may include areas of specialty, applicable professional
standards and other legal requirements.
(iii) Evaluate the appropriateness of that expert’s work:
With respect to following:
(a) Relevance and reasonableness: of that expert findings
and conclusion.
(b) Relevance and reasonableness: of assumptions and
methods used; and
(c) Relevance, completeness and accuracy: of source
data.
Q.68 As a Statutory Auditor, how would you deal with the following case:
M/s LNK’s group gratuity scheme’s valuation by actuary shows wide
variation compared to the previous year’s figures.

Page 110
Answer: Using the work of Management Expert as an audit evidence:
• SA 500 (Revised), “Audit Evidence” states that the auditor has
to evaluate the work of management expert, say, actuary, before
adopting the same.
• The work of management expert is required to be evaluated in
terms of following:
(i) Relevance and reasonableness of that expert findings and
conclusion.
(ii) Relevance and reasonableness of assumptions and
methods used; and
(iii) Relevance, completeness and accuracy of source data.
• This becomes more crucial since M/s LNK’s group gratuity
scheme’s valuation by actuary shows wide variation compared
to previous year’s figures. There is no doubt that
appropriateness, reasonableness of assumptions and methods
used are the responsibility of the expert, but the auditor has to
determine whether they are reasonable based on the auditor’s
knowledge of the client’s business and result of his audit
procedures.
• In the present case, the auditor must verify the reasonableness
of assumptions made and methods adopted by the actuary in
the evaluation particularly with reference to factors such as
rate of return on investments, retirement age, number and
salary of employees, etc.

Page 111
Conclusion: In view of provisions of SA 500 as discussed above,
the auditor has to satisfy himself whether valuation done by the
actuary can be adopted, otherwise he may report on his findings
for wide variation.
Q.69 The auditor of SS Ltd. accepted the gratuity liability valuation based
on the certificate issued by a qualified actuary. However, the auditor
noticed that the retirement age adopted is 65 years as against the
existing retirement age of 60 years. The company is considering a
proposal to increase the retirement age. Comment.
[Nov. 11 (5 Marks), MTP-April 18]
Or
For determining the liability for Gratuity, Actuary’s Report is
produced to the auditor. On examination auditor notices a serious
wrong assumption in the report. Auditor challenges the Actuary’s
report – Comment.
Answer: Using the work of Management Expert as an audit evidence:
• SA 500 (Revised), “Audit Evidence” states that the auditor has
to evaluate the work of management expert, say, actuary, before
adopting the same.
• The work of management expert is required to be evaluated in
terms of following:
(i) Relevance and reasonableness of that expert findings and
conclusion.

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(ii) Relevance and reasonableness of assumptions and methods
used; and
(iii)Relevance, completeness and accuracy of source data.
• There is no doubt that appropriateness, reasonableness of
assumptions and methods used are the responsibility of the
expert, but the auditor has to determine whether they are
reasonable based on the auditor’s knowledge of the client’s
business and result of his audit procedures.
• In the instant case, a qualified actuary has issued a certificate
for gratuity liability valuation, for which retirement age
adopted is 65 years against the existing retirement age of 60
years; however, the company is considering a proposal to
increase the retirement age.
Conclusion: In view of provisions of SA 500 as discussed above,
the assumption made by actuary has no relevance and
reasonableness as presently retiring age is of 60 years. Hence the
auditor is required to bring out the facts to the notice of
management and advice the modification accordingly. In case of
failure of compliance of the same the auditor may qualify the
report.
Q.70 Y Ltd. Engaged an actuary to ascertain its employee cost, gratuity and
leave encashment liabilities. As the auditor of Y Ltd., you would like to
use the report of actuary as an audit evidence and for this purpose

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auditor is required to evaluate the competence, capability and
objectivity of the expert. What are the sources from where
information about the competence, capability and objectivity of expert
may be obtained?
Answer: Sources of information about competence, capability and
objectivity of the expert:
As per SA 500 “Audit Evidence” if any information is prepared by
the entity using the work of management expert and auditor has
to consider that information as audit evidence, he is required to
evaluate the competence, capability and objectivity of that expert.
Information regarding the competence, capabilities and
objectivity of a management’s expert may come from a variety of
sources, such as:
1. Personal experience with previous work of that expert.
2. Discussions with that expert.
3. Discussions with others who are familiar with that expert’s
work.
4. Knowledge of that expert’s qualifications, membership of a
professional body or industry association, license to practice,
or other forms of external recognition.
5. Published papers or books written by that expert.
6. An auditor’s expert, if any, who assists the auditor in obtaining
sufficient appropriate audit evidence with respect to
information produced by the management’s expert.

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Q.71 Gap Ltd. possesses some investment for which there is no ready
market and to assess its fair market value it hires an expert, the result
of which it can use in preparing its financial statement. Being an
Auditor of the Company, state the matters which may affect the nature,
timing and extent of audit procedure to be adopted by you in the
instant case. [May 18 – Old Syllabus (5 Marks)]
Answer: Matters affecting NTE of Audit procedures in case of
information being produced using work of management
expert:
As per SA 500 “Audit Evidence” if any information is prepared by
the entity using the work of management expert and auditor has
to consider that information as audit evidence, he is required to
evaluate the competence, capability and objectivity of that expert.
Matters which may affect nature, timing and extent of audit
procedures in such a case are:
1. The nature and complexity of the matter to which the
management’s expert relates.
2. The risks of material misstatement in the matter.
3. The availability of alternative sources of audit evidence.
4. The nature, scope and objectives of the management’s expert’s
work.
5. Whether the management’s expert is employed by the entity,
or is a party engaged by it to provide relevant services.

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6. The extent to which management can exercise control or
influence over the work of the management’s expert.
7. Whether the management’s expert is subject to technical
performance standards or other professional or industry
requirements.
8. The nature and extent of any controls within the entity over
the management’s expert’s work.
9. The auditor’s knowledge and experience of the management’s
expert’s field of expertise.
10. The auditor’s previous experience of the work of that expert.
Q.72 “Obtaining Audit Evidence in performing compliance and Substantive
procedures.” Comment.
Answer: Methods to obtain audit evidence:
SA 500 “Audit Evidence” requires that the auditor shall design and
perform audit procedures that are appropriate in the
circumstances for the purpose of obtaining sufficient appropriate
audit evidence.
Audit Procedures to obtain audit evidence:
(a) Risk assessment Procedures
(b) Further Audit procedures: It comprises of
1. Test of Controls, and
2. Substantive Procedures: It consists of Tests of Details and
Substantive Analytical Procedures

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Nature and timing of audit procedures affected by:
• Availability of audit evidence in electronic form only.
• Availability of audit evidence at certain points/ periods in time.
As per SA 500, the auditor can use the following methods while
performing compliance and substantive procedures:
(a) Inspection: It involves examining records or documents,
whether internal or external, in paper form, electronic form,
or other media, or a physical examination of an asset.
(b) Observation: It consists of looking at a process or procedure
being performed by others, for example, the auditor’s
observation of inventory counting by the entity’s personnel.
(c) External Confirmation: It represents audit evidence obtained
by the auditor as a direct written response to the auditor from
a third party (the confirming party), in paper form, or by
electronic or other medium.
(d) Recalculation: It consists of checking mathematical accuracy
of documents or records. It may be performed manually or
electronically.
(e) Re-performance: It involves the auditor’s independent
execution of procedures or controls that were originally
performed as part of the entity’s internal control.
(f) Analytical Procedures: It consists of evaluations of financial
information made by a study of relationships among both
financial and non-financial data.

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(g) Inquiry: It consists of seeking information of knowledgeable

persons, both financial and non- financial, within the entity or
outside the entity.
Q.73 Write short note on: Inquiry. [Nov. 10 (4 Marks)]
Or
Write short note on: Inquiry as one of the methods of collecting audit
evidence. [May 17 (4 Marks)]
Answer: Inquiry:
• As per SA 500 “Audit Evidence”, inquiry is one of the methods
to obtain audit evidences. Inquiry consists of seeking
information of knowledgeable persons, both financial and non-
financial, within the entity or outside the entity.
• Inquiry is used extensively throughout the audit in addition to
other audit procedures.
• Inquiries may range from formal written inquiries to informal
oral inquiries. However, in case oral inquiries, the auditor may
consider it necessary to obtain written representations from
management and, where appropriate, TCWG to confirm
responses to such inquiries.
• Evaluating responses to inquiries is an integral part of the
inquiry process.
• Responses to inquiries may provide the auditor with
information not previously possessed or with corroborative
audit evidence. Alternatively, responses might provide

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information that differs significantly from other information
that the auditor has obtained. In some cases, responses to
inquiries provide a basis for the auditor to modify or perform
additional audit procedures.

Manycandidates mentioned various methods of collecting Auditing Evidence which is not
required. Most of them failed to mention about auditor’s role in evaluating the
Responses to Inquiry; rather they discussed other irrelevant matters without knowing
the exact requirements of SA 500, “Audit Evidence”.
Q.74 Write short note on: Assessing the reliability of Audit Evidence.
[May 09 (4 Marks)]
Answer: Assessing the reliability of audit evidence:
As per SA 500 “Audit Evidence” the reliability of information to be
used as audit evidence, and therefore of the audit evidence itself, is
influenced by its source and its nature, and the circumstances under
which it is obtained. While recognising that exceptions may exist, the
following generalisations about the reliability of audit evidence may
be useful:
(a) The reliability of audit evidence is increased when it is obtained
from independent sources outside the entity.
(b) The reliability of audit evidence that is generated internally is
increased when the related controls, imposed by the entity are
effective.
(c) Audit evidence obtained directly by the auditor is more reliable
than audit evidence obtained indirectly.

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(d) Audit evidence in documentary form, whether paper, electronic,
or other medium, is more reliable than evidence obtained orally.
(e) Audit evidence provided by original documents is more reliable
than audit evidence provided by photocopies, or documents that
have been filmed, digitised or otherwise transformed into
electronic form, the reliability of which may depend on the
controls over their preparation and maintenance.
1.18 - SA 501 “Audit Evidence – Specific Considerations for Selected Items”
Q.75 LMN Ltd. supplies navy uniforms across the country. The company has
4 warehouses at different locations throughout the India and 5
warehouses at the borders. The major stocks are generally supplied
from the borders. LMN Ltd. appointed M/s OPQ & Co. to conduct its
audit for the financial year 2019-20. Mr. O, partner of M/s OPQ & Co.,
attended all the physical inventory counting conducted throughout the
India but could not attend the same at borders due to some
unavoidable reason.
You are required to advise M/s OPQ & Co.,
(a) How sufficient appropriate audit evidence regarding the existence
and condition of inventory may be obtained?
(b) How an auditor is supposed to deal when attendance at physical
inventory counting is impracticable? [RTP-May 18]
Or

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Crush Ltd. is a dealer in fast moving consumer goods. The Company
has warehouses throughout the country where the stocks are stored.
The Auditor of the Company normally conduct physical verification of
stocks along with the Management at the end of the financial year.
However, the Auditor could not be physically present during stock-
tacking at two places on account of certain disturbances in the region.
In the light of the above facts:
(i) How sufficient appropriate audit evidence regarding the condition
and existence of inventory may be obtained?
(ii) How an Auditor is supposed to deal when attendance at physical
inventory counting is impracticable?
Answer: Auditor’s duties to obtain evidences regarding existence and
condition of inventory:
SA 501 “Audit Evidence – Specific Considerations for Specific
Items”, requires from the auditor that when inventory is material
to the financial statements, he shall obtain sufficient appropriate
audit evidence regarding the existence and condition of inventory
by attendance at physical inventory counting, unless
impracticable, to:
(i) Evaluate management’s instructions and procedures for
recording and controlling the results of the entity’s physical
inventory counting;

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(ii) Observe the performance of management’s count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts.
Attendance at physical inventory counting involves:
1. Inspecting the inventory to ascertain its existence and evaluate
its condition, and performing test counts;
2. Observing compliance with management’s instructions and the
performance of procedures for recording and controlling the
results of the physical inventory count; and
3. Obtaining audit evidence as to the reliability of management’s
count procedures.
Auditor’s procedures in case of impractical situations:
• Perform alternative audit procedures to obtain sufficient
appropriate audit evidence regarding existence and condition
of inventory.
• Alternative Audit Procedure may include inspection of
documentation of the subsequent sale of specific inventory
items acquired/purchased prior to physical inventory
counting.
• If it is not possible to do so, modify the opinion in the auditor’s
report in accordance with SA 705.

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Q.76 You are the auditor of Easy Communications Ltd. for the year 2018–19.
The inventory as at the end of the year i.e. 31.3.19 was Rs. 2.25 crores.
Due to unavoidable circumstances, you could not be present at the
time of annual physical verification. Under the above circumstances
how would you ensure that the physical verification conducted by the
management was in order? [Nov. 08 (5 Marks), RTP-May 20]
Answer: Auditor’s procedures w.r.t. inventory count procedures:
• SA 501 “Audit Evidence – Specific Considerations for Specific
Items”, requires from the auditor that when inventory is
material to the financial statements, he shall obtain sufficient
appropriate audit evidence regarding the existence and
condition of inventory by attendance at physical inventory
counting, unless impracticable, to:
(i) Evaluate management’s instructions and procedures for
recording and controlling the results of the entity’s
physical inventory counting;
(ii) Observe the performance of management’s count
procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts.
• SA 501 further provides that if the auditor is unable to be
present at the physical inventory count on the date planned due
to unforeseen circumstances, the auditor should take or
observe some physical counts on an alternative date and

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perform audit procedures on intervening transactions to assess
whether the changes in inventory between the date of physical
count and the period end date are correctly recorded.
• The auditor would also verify the procedure adopted and
treatment given for the discrepancies noticed during the
physical count. The auditor would also ensure that appropriate
cut off procedures were followed by the management.
• The auditor may also seek management’s written
representation on (a) the completeness of information provided
regarding the inventory, and (b) assurance with regard to
adherence to laid down procedures for physical inventory
count.
Q.77 “If inventory is material to the financial statements, the auditor shall
obtain sufficient appropriate audit evidence regarding the existence of
inventory by attending the physical inventory counting unless
impracticable.” Disuses. [Nov. 15 (5 Marks)]
Answer: Auditor’s procedures w.r.t. inventory count procedures:
• SA 501 “Audit Evidence – Specific Considerations for Specific
Items”, requires from the auditor that when inventory is
material to the financial statements, he shall obtain sufficient
appropriate audit evidence regarding the existence and
condition of inventory by attendance at physical inventory
counting, unless impracticable, to:

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(a) Evaluate management’s instructions and procedures for
recording and controlling the results of the entity’s physical
inventory counting;
(b) Observe the performance of management’s count procedures;
(c) Inspect the inventory; and
(d) Perform test counts;
• Attendance at physical inventory counting involves:
(a) Inspecting the inventory to ascertain its existence and evaluate
its condition, and performing test counts;
(b) Observing compliance with management’s instructions and the
performance of procedures for recording and controlling the
results of the physical inventory count; and
(c) Obtaining audit evidence as to the reliability of management’s
count procedures.
• These procedures may serve as test of controls or substantive
procedures depending on the auditor’s risk assessment, planned
approach and the specific procedures carried out.

Examinees failed to highlight the procedure that an auditor would perform to obtain
sufficient appropriate audit evidence by attending the physical inventory counting.
Irrelevant points on AS-2 and CARO were discussed. Some examinees wrote regarding
physical verification which was not required. Also, few examinees discussed about
audit of stocks.

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Q.78 Your firm has been appointed as the statutory auditors of GBM Private
Limited for the financial year 2018-19. While verification of company’s
inventories as on 31st March 2019, you found that the significant
amount of inventories belonging to the company are held by other
parties. However, the company has kept all the records of the
inventories maintained by other parties. What is your duty as an
auditor in order to ensure that third parties are not such with whom
the stock should not be held and the stock as disclosed in company’s
records actually belongs to them?
Answer: Inventory under the Custody and Control of a Third Party:

As per SA 501, “Audit Evidence—Specific Considerations for
Selected Items” when inventory under the custody and control of
a third party is material to the financial statements, the auditor
shall obtain sufficient appropriate audit evidence regarding the
existence and condition of that inventory by performing one or
both of the following:
(i) Request confirmation from the third party as to the quantities

and condition of inventory held on behalf of the entity.
(ii) Perform inspection or other audit procedures appropriate in
the circumstances, for example where information is obtained
that raises doubt about the integrity and objectivity of the
third party, the auditor may consider it appropriate to
perform other audit procedures instead of, or in addition to,
confirmation with the third party. Examples of other audit
procedures include:

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• Attending, or arranging for another auditor to attend, the

third party’s physical counting of inventory, if practicable.
• Obtaining another auditor’s report, or a service auditor’s
report, on the adequacy of the third party’s internal control
for ensuring that inventory is properly counted and
adequately safeguarded.
• Inspecting documentation regarding inventory held by
third parties, for example, warehouse receipts.
• Requesting confirmation from other parties when
inventory has been pledged as collateral.
1.19 - SA 505 “External Confirmation”
Q.79 Write short note on: External Confirmations in audit.
[Nov. 09 (4 Marks)]
Answer: External Confirmations:
• As per SA 505 external confirmation may be defined as Audit

evidence obtained as a direct written response to the auditor
from a third party (the confirming party), in paper form, or by
electronic or other medium.
• External confirmations are of two types:
(a) Positive confirmation request – A request that the
confirming party respond directly to the auditor indicating
whether the confirming party agrees or disagrees with the
information in the request or providing the requested
information.

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(b) Negative confirmation request – A request that the

confirming party respond directly to the auditor only if the
confirming party disagrees with the information provided
in the request.
• External confirmation procedures frequently are relevant
when addressing assertions associated with account balances
and their elements but need not be restricted to these items.
For example, the auditor may request external confirmation of
the terms of agreements, contracts, or transactions between an
entity and other parties.
Q.80 Write short notes on Situations where external confirmations can be
used.
Answer: Situations where external confirmations can be used:
External confirmation procedures frequently are relevant when
addressing assertions associated with account balances and their
elements but need not be restricted to these items. For example,
the auditor may request external confirmation of the terms of
agreements, contracts, or transactions between an entity and
other parties.
Other situations where external confirmation procedures may
provide relevant audit evidence include:
(i) Bank balances and other information relevant to banking
relationships.
(ii) Accounts receivable balances and terms.

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(iii) Inventories held by third parties at bonded warehouses for
processing or on consignment.
(iv) Property title deeds held by lawyers or financiers for safe
custody or as security.
(v) Investments held for safekeeping by third parties or
purchased from stockbrokers but not delivered at the
balance sheet date.
(vi) Amounts due to lenders, including relevant terms of
repayment.
(vii) Accounts payable balances and terms.
Q.81 Mr. Z who is appointed as auditor of Elite Co. Ltd. wants to use
confirmation request as audit evidence during the course of audit.
What are the factors to be considered by Mr. Z when designing a
confirmation request? Also state the effects of using positive external
confirmation request by Mr. Z. [May 16 (5 Marks)]
Answer: Factors to be considered while designing confirmation
requests:
As per SA 505 “External Confirmations” factors to consider when
designing confirmation requests include
(i) Assertion being addressed.
(ii) Specific identified RMM.
(iii) Layout & presentation of request.
(iv) Prior experience on the audit of similar engagements.
(v) Method of communication.

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(vi) Management authorisation/encouragement to Confirming
Party to respond to auditor.
(vii) Ability of Confirming Party to provide/confirm requested
information.
Effects of Positive Confirmation Requests:
• A positive external confirmation request asks the confirming
party to reply to the auditor in all cases, either by indicating
the confirming party’s agreement with the given information,
or by asking the confirming party to provide information.
• A response to a positive confirmation request ordinarily is
expected to provide reliable audit evidence. There is a risk,
however, that a confirming party may reply to the confirmation
request without verifying that the information is correct.
• The auditor may reduce this risk by using positive
confirmation requests that do not state the amount (or other
information) on the confirmation request and ask the
confirming party to fill in the amount or furnish other
information.

Candidates, in general, failed to state all the important factors to be considered
whiledesigning the confirmation request and to explain the effect of positive
confirmation.
Q.82 The management of S Ltd. Request you not to seek confirmation from
its debtors. As the auditor of S Ltd., what can be an appropriate
response? [May 11 (6 Marks)]

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Or
Never Permit Limited refused to allow you to get direct confirmation
of the outstanding balances of trade receivables. You want to ensure
on grounds of materiality that atleast outstanding above a threshold
limit needs to be confirmed and reconciliation is to be carried out
before finalising the audit. If the company does not relent, how will
you respond? [May 18 – New Syllabus (4 Marks)]
Answer: Management refusal to allow auditor to send confirmation
request:
• SA 505, “External Confirmations”, establishes standards on the
auditor’s use of external confirmation as a means of obtaining
audit evidence. It requires that the auditor should employ
external confirmation procedures in consultation with the
management.
• The auditor may come across certain situations in which the
management may request him not to seek external
confirmation from certain parties because of some reasons, for
example, due to a dispute with the particular creditor or debtor.
• If the management refuses to allow the auditor to a send a
confirmation request, the auditor shall:
a. Inquire as to Management’s reasons for the refusal, and seek
audit evidence as to their validity and reasonableness,

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b. Evaluate the implications of management’s refusal on the
auditor’s assessment of the relevant risks of material
misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures, and
c. Perform alternative audit procedures designed to obtain
relevant and reliable audit evidence.
• If the auditor concludes that management’s refusal to allow the
auditor to send a confirmation request is unreasonable or the
auditor is unable to obtain relevant and reliable audit evidence
from alternative audit procedures, the auditor shall
communicate with TCWG and also determine its implication for
the audit and his opinion.
Q.83 The auditor of H Ltd. wanted to obtain confirmation from its creditors.
But the management made a request to the auditor not to seek
confirmation from certain creditors citing disputes. Can the auditor of
H Ltd. Accede to this request? [May 13 (4 Marks)]
Or
Your firm has been appointed as the statutory auditors of AGM Private
Limited for thefinancial year 2018-19. While verification of company’s
trade receivables as on 31stMarch 2019, accountant of AGM Ltd. has
requested you, not to send balanceconfirmations to a particular group
of trade receivables since the said balances areunder dispute and the
matter is pending in the Court. As a Statutory Auditor, how would you
deal in this situation? [RTP-May 20]

Page 132
Answer: Refer Answer of Q. No. 82.
Q.84 Moon Limited replaced its statutory auditor for the Financial year
2019-20. During the course of audit, the new auditor found a credit
item of Rs. 5 lakhs. On enquiry, the company explained him that it is, a
very old credit balance. The creditor had neither approached for the
payment nor he is traceable. Under the circumstances, no
confirmation of the credit balance is available. [Nov. 09 (5 Marks)]
Answer: Auditor’s duties in case of non-availability of External
Confirmation:
• SA 505 “External Confirmations” provides that if the auditor has
determined that a response to a positive confirmation request
is necessary to obtain sufficient appropriate audit evidence, and
alternative audit procedures will not provide the audit evidence
the auditor requires, he should determine the implications for
the audit and the auditor’s opinion in accordance with SA 705.
• In the present case the identities of trade payables are not
traceable to confirm the credit balance as appearing in the
financial statement of the company. It is also not a case of
pending litigation. It might be a case that an income of Rs. 5
lakhs had been hidden in previous year/s.
• The statutory auditor should examine the validity of the credit
balance as appeared in the company’s financial statements. He
should obtain sufficient evidence in support of the balance. He
should apply alternative audit procedures to get documentary

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proof for the transaction/s and should not rely entirely on the
management representation. Finally, he should include the
matter by way of a qualification in his audit report to the
members.
Q.85 As an auditor how would you deal with the following: When the audit
team visited the client to perform substantive audit of debtor, the
client produced ledger account of customers and confirmations for the
top 10 customers. One of the debtors was more than 5 years old, but it
had confirmed his balance. [May 10 (5 Marks)]
Answer: Auditor’s duties in case of doubt over reliability of external

confirmations:
• SA 505 “External Confirmations” deals with the auditor’s use of

external confirmation procedures to obtain audit evidence.
External confirmation is the process of obtaining and evaluating
audit evidence through a direct communication from a third
party in response to a request for information about a
particular item affecting assertions made by the management in
the financial statements.
• As per SA 505, the auditor is required to maintain a control over
the process of selecting those to whom a request will be sent
out, the preparation and sending of confirmation requests and
responses to those requests. This is because there have been
several cases of clients presenting forged confirmation to
auditors when such control was absent.

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• In the present case, one of the debtors of more than 5 years old
had confirmed his balance. The auditor should enquire into the
debtor whose dues are outstanding for 5 years or more about
his financial abilities and why he has not paid, reasons behind
the same, and if found adverse, the client should be advised to
provide for “Provision for bad debts’ and also to confirm that it
is not a forged confirmation.
Q.86 During the course of audit of Star Limited the auditor received some of
the confirmation of the balances of trade payables outstanding in the
balance sheet through external confirmation by negative confirmation
request. In the list of trade payables, there are number of trade
payables of small balances except one, old outstanding of Rs. 15 Lacs,
of whom, no confirmation on the credit balance received. Comment
with respect to Standard of Auditing. [May 14 (5 Marks), RTP-May 18]
Answer: Response to Negative Confirmation Request:
• As per SA 505, “External Confirmation”, Negative Confirmation

is a request that the confirming party respond directly to the
auditor only if the confirming party disagrees with the
information provided in the request.
• Negative confirmations provide less persuasive audit evidence
than positive confirmations. In case of negative confirmation
request, confirming parties may be more likely to respond
indicating their disagreement with a confirmation request
when the information in the request is not in their favor, and
less likely to respond otherwise.

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• In the instant case, the auditor sent the negative confirmation

requesting the trade payables having outstanding balances in
the balance sheet while doing audit of Star Limited. One of the
old outstanding of rupees 15 lacs has not sent the confirmation
on the credit balance.
• Non-response for negative confirmation request does not
means that there is some misstatement as negative
confirmation request itself is to respond to the auditor only if
the confirming party disagrees with the information provided
in the request.
• In the present case, considering the materiality of the account
balance, the auditor may examine subsequent cash
disbursements or correspondence from third parties, and other
records, such as goods received notes.
Q.87 M/s ABC & Co, LLP are appointed auditors of Sharp Company Ltd. for
the year ended 31st March, 2020. As part of the audit process, they
want to use confirmation procedures as audit evidence during the
course of audit. In view of the fact that positive confirmations are not
responded favorably, the firm also intends to use negative
confirmation requests. What are the factors to be considered for the
same? [May 19 – Old Syllabus (7 Marks)]
Answer: Use of negative confirmations:
• As per SA 505, “External Confirmation”, Negative Confirmation
is a request that the confirming party respond directly to the
auditor only if the confirming party disagrees with the

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information provided in the request.
• Negative confirmations provide less persuasive audit evidence
than positive confirmations. Accordingly, the auditor shall use
negative confirmation requests as the sole substantive audit
procedure only when all of the following conditions are
present:
(a) Low Risk of material misstatement and auditor has
obtained sufficient appropriate audit evidence regarding
the operating effectiveness of controls.
(b) The population comprises a large number of small,
homogeneous, account balances or transactions.
(c) A very low exception rate is expected.
(d) The auditor is not aware of circumstances or conditions
that would cause recipients of negative confirmation
requests to disregard such requests.
Factors to be considered while designing confirmation
requests: Refer Answer of Q. No. 81
1.20 - SA 510 “Initial Audit Engagements – Opening Balances”
Q.88 What are Initial Audit Engagement?
Answer: Initial Audit Engagements:
As per SA 510 “Initial Audit Engagements - Opening Balances”,
initial audit engagement is an engagement in which either:

Page 137
(i) The financial statements for the prior period were not
audited; or
(ii) The financial statements for the prior period were audited by
a predecessor auditor.
Q.89 Comment on the following: You have been appointed as the auditor of
Good Health Ltd. for 2019-20 which was audited by CA Trustworthy in
2018-19. As the Auditor of the company state the steps you would take
to ensure that the Closing Balances of 2018-19 have been brought to
account in 2019-20 as Opening Balances and the Opening Balances do
not contain misstatements.
[Nov. 08 (5 Marks), MTP-Aug. 18, RTP- Nov. 18]
Or
What are the procedures to be followed by a Statutory Auditor in the
audit of opening balances if the financial statements for the preceding
year were audited by another auditor?
Or
You have been appointed as statutory auditor of M/s Moon Ltd. for the
financial year 2018-19. As the auditor of the company you want to
ensure that closing balances of previous year have been correctly
brought forward as opening balances in the current year. State the
audit procedures for the same to ensure that there is no –
misstatement. [Nov. 19 – Old Syllabus (5 Marks)]
Answer: Audit procedures for verification of opening balances in case
of initial audit engagement:

Page 138
SA 510 “Initial Audit Engagements- Opening Balances”, deals with
the auditor’s responsibilities relating to verification of opening
balances in case of initial audit engagements. Accordingly, the
procedures to be performed by the auditor are:
• The auditor shall read the most recent financial statements,
if any, and the predecessor auditor’s report thereon, if any, for
information relevant to opening balances, including disclosures.
• The auditor shall obtain sufficient appropriate audit evidence
about whether the opening balances contain misstatements
that materially affect the current period’s F.S. by:
(a) Determining whether the prior period’s closing balances
have been correctly brought forward to the current period
or, when appropriate, any adjustments have been disclosed
as prior period items in the current year’s Statement of
Profit and Loss;
(b) Determining whether the opening balances reflect the
application of appropriate accounting policies; and
(c) Performing one or more of the following:
(i) Where the prior year F.S. were audited, perusing the
copies of the audited F.S. including the other relevant
documents relating to the prior period F.S.;
(ii) Evaluating whether audit procedures performed in the
current period provide evidence relevant to the
opening balances; or

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(iii) Performing specific audit procedures to obtain
evidence regarding the opening balances. For current
assets and liabilities some audit evidence can
ordinarily be obtained as part of audit procedures
during the current period. For example, the
collection/payment of opening balances of receivables
and payables will provide audit evidence as to their
existence, rights and obligations, completeness and
valuation at the beginning of the period.
In respect of other assets and liabilities such as fixed assets,
investments long term debt, the auditor will examine the records
relating to opening balances. The auditor may also be able to get
confirmation from third parties (e.g., balances of long term loan
obtained from banks).
• If the auditor obtains audit evidence that the opening balances
contain misstatements that could materially affect the current
period’s F.S., the auditor shall perform such additional audit
procedures as are appropriate in the circumstances to
determine the effect on the current period’s F.S.
• If the auditor concludes that such misstatements exist in the
current period’s F.S., the auditor shall communicate the
misstatements with the appropriate level of management and
TCWG in accordance with SA 450.

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Q.85 In an initial audit engagement, the auditor will have to satisfy about
the sufficiency and appropriateness of ‘Opening balances’ to ensure
that they are free from instatements, which may materially affect the
current financial statements. Lay down the audit procedure, you will
follow, when financial statements are audited for the first time.
If, after performing the procedure, you are not satisfied about the
correctness of ‘Opening Balances’, what approach you will adopt in
drafting your audit report? [May 15 (5 Marks), MTP-April 18, Oct. 19]
Or
Mr. X has been appointed as an auditor of M/s ABC Ltd., Mr. X wants to
be satisfied about the sufficiency and appropriateness of ‘Opening
Balances’ to ensure that they are free from misstatements. Lay down
the audit procedure, Mr. X should follow, in the initial audit
engagement of M/s ABC Ltd. Also suggest the approach to be followed
regarding mention in the audit report if Mr. X is not satisfied about the
correctness of ‘Opening Balances’? [Nov. 19 – New Syllabus (4 Marks)]
Considerations while drafting Report:
If the auditor is unable to obtain sufficient appropriate audit
evidence regarding the opening balances, the auditor shall express
a qualified opinion or a disclaimer of opinion, as appropriate.
Further, If the auditor concludes that the opening balances contain

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a misstatement that materially affects the current period’s
financial statements, and the effect of the misstatement is not
properly accounted for or not adequately presented or disclosed,
the auditor shall express a qualified opinion or an adverse opinion
in accordance with SA 705.

Most of thecandidates could not write approach for drafting of Audit Report in case of
Opening Balancewhich contains misstatement. Many candidates wrote answer about
using previous yearaudited accounts, while question specifically mentioned that the
financial statements wereaudited for the first time.
Q.91 CA Mr. Jack, a recently qualified practicing Chartered Accountant got
his first audit assignment of Futura (P) Ltd. for the financial year 2019-
20. He obtained all the relevant appropriate audit evidence for the
items related to Statement of Profit and Loss. However, while auditing
the Balance Sheet items, CA Jack left out obtaining appropriate audit
evidence, say, confirmations, from the outstanding Accounts
Receivable amounting Rs. 100 lakhs, continued as it is from the last
year, on the affirmation of the management that there is no receipts
and further credits during the year. CA Jack, therefore, excluded from
the audit programme, the audit of accounts receivable on the
understanding that it pertains to the preceding year which was
already audited by predecessor auditor. Comment. [MTP-Oct.18]

As per SA 510 “Initial Audit Engagements- Opening Balances”, the

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objective of the Auditor while conducting an initial audit

engagement with respect to opening balances is to obtain
sufficient appropriate audit evidence so that the-
(i) opening balances of the preceding period have been correctly

brought forward to the current period;
(ii) opening balances do not contain any misstatement that
materially affect the current period’s financial statements;
and
(iii) appropriate accounting policies reflected in the opening
balances have been consistently applied in the current
period’s financial statements, or changes thereto are properly
accounted for and adequately presented and disclosed in
accordance with the applicable financial reporting
framework.
If the prior period’s financial statements were audited by a

predecessor auditor, the auditor may be able to obtain sufficient
appropriate audit evidence regarding the opening balances by
perusing the copies of the audited financial statements including
the other relevant documents relating to the prior period financial
statements such as supporting schedules to the audited financial
statements. Ordinarily, the current auditor can place reliance on
the closing balances contained in the financial statements for the
preceding period, except when during the performance of audit
procedures for the current period the possibility of misstatements
in opening balances is indicated.

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In the given case, the management of Futura (P) Ltd. has restrained
CA Jack, its auditor, from obtaining appropriate audit evidence for
balances of Accounts Receivable outstanding as it is from the
preceding year. CA Jack, on believing that the preceding year
balances have already been audited and on the statement of the
management that there are no receipts and credits during the
current year, therefore excluded the verification of Accounts
Receivable from his audit programme.
Conclusion: CA Jack was required to obtain from the management a
written representation (as covered by SA 580) for their views and
expressions; and to perform appropriate procedures on closing
balances of Accounts Receivable to ensure its appropriateness. In the
present case, CA Jack will be held guilty for professional misconduct
for not exercising due diligence in the conduct of his professional
duties as per the Code of Ethics.
1.21 - SA 520 “Analytical Procedures”
Q.92 What are the considerations to be kept in mind while performing
analytical procedures on data prepared by the client?
[May 09 (6 Marks)]
Answer: Auditor’s considerations while performing analytical
procedures:
SA 520 “Analytical Procedures” deals with the auditor’s use of
analytical procedures as substantive procedures and as
procedures near the end of the audit that assist the auditor when

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forming an overall conclusion on the financial statements.
Accordingly, when the auditor intends to perform analytical
procedures on data prepared by the client, he should consider the
following:
1. Determine the suitability of particular substantive
analytical procedures for given assertions, taking account of
the assessed risks of material misstatement and tests of details,
if any, for these assertions;
2. Evaluate the reliability of data from which the auditor’s
expectation of recorded amounts or ratios is developed, taking
account of source, comparability, and nature and relevance of
information available, and controls over preparation;
3. Develop an expectation of recorded amounts or ratios and
evaluate whether the expectation is sufficiently precise to
identify a misstatement that, individually or when aggregated
with other misstatements, may cause the financial statements
to be materially misstated; and
4. Determine the amount of any difference of recorded
amounts from expected values that is acceptable without
further investigation.
Q.93 In the audit of Hotel Great Hay Limited its auditor wants to use the
analytical procedure as substantive procedure in respect of room
rental income as well as pay roll costs, guide him as to how it can be
done. [Nov. 13 (4 Marks)]

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Or
You have been appointed as an auditor of M/s Excellent Hotels Ltd. As
a senior partner, you want to use analytical procedures in respect of
room rentals as well as payroll expenses. Discuss.
Answer: Applying analytical procedures as substantive procedures:
• SA 520 “Analytical Procedures” deals with the auditor’s use of
procedures near the end of the audit that assist the auditor
when forming an overall conclusion on the financial
statements.
• Accordingly, in some cases, predictive model may be effective
as an analytical procedure.
• In case of Payroll cost - Where an entity has a known number
of employees at fixed rates of pay throughout the period, it
may be possible for the auditor to use this data to estimate the
total payroll costs for the period with a high degree of
accuracy, thereby providing audit evidence for a significant
item in the financial statements and reducing the need to
perform tests of details on the payroll.
• In case of Room Rental Income of Hotel, different types of
analytical procedures provide different levels of assurance.
Analytical procedures involving the prediction of total rental
income in case of hotel taking the room tariff rates, the number

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of rooms and vacancy rates into consideration, can provide
persuasive evidence and may eliminate the need for further
verification by means of tests of details, provided the elements
are appropriately verified.
Q.94 The reliability of data in influenced by its source and nature and is
dependent on the circumstances under which it is obtained.
Accordingly, what are the relevant criteria which determine whether
the data is reliable for the purposes of designing substantive analytical
procedures? [Nov. 15 (4 Marks)]
Or
Write short notes on: Relevant Criteria for determining Reliability of
Data as per SA 520 ‘Analytical Procedures’.
Answer: Criteria for determining the reliability of data used for
analytical procedures:
when forming an overall conclusion on the financial statements.
• Accordingly, when designing and performing substantive
analytical procedures, either alone or in combination with tests
of details, as substantive procedures in accordance with SA 330,
the auditor shall evaluate the reliability of data from which the
auditor’s expectation of recorded amounts or ratios is
developed, considering the following:

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(i) Source of the information available. For example,
information may be more reliable when it is obtained from
independent sources outside the entity;
(ii) Comparability of the information available. For
example, broad industry data may need to be
supplemented to be comparable to that of an entity that
produces and sells specialised products;
(iii) Nature and relevance of the information available. For
example, whether budgets have been established as results
to be expected rather than as goals to be achieved; and
(iv) Controls over the preparation of the information that
are designed to ensure its completeness, accuracy and
validity. For example, controls over the preparation, review
and maintenance of budgets.

Examinees did not explain therelevant criteria when determining whether data is
reliable for the purpose of designingsubstantive analytical procedures. Irrelevant
points on AS-18 were discussed. Someexaminees wrote wrongly about analytical
procedures. Also, some examinees answered withrespect to source and type of audit
evidence instead of reliability of audit evidence.
Q.95 In audit of DEF Limited, the auditor had made use of certain analytical
procedures with regard to certain key data in the statement of profit
and loss. The results obtained showed inconsistencies with other
relevant information. State the course of action that the Auditor
should take to ensure that the risk of Material misstatement would be
contained to a low level fixed as per materiality level.

Page 148
Answer: Investigating Results of Analytical Procedures:
when forming an overall conclusion on the financial statements.
• As per SA 520, if analytical procedures performed in accordance
with this SA 520 identify fluctuations or relationships that are
inconsistent with other relevant information or that differ from
expected values by a significant amount, the auditor shall
investigate such differences by:
(a) Inquiring of management and obtaining appropriate audit
evidence relevant to management’s responses; and
(b) Performing other audit procedures as necessary in the
circumstances.
• Audit evidence relevant to management’s responses may be
obtained by evaluating those responses taking into account the
auditor’s understanding of the entity and its environment, and
with other audit evidence obtained during the course of the
audit.
• The need to perform other audit procedures may arise when,
for example, management is unable to provide an explanation,
or the explanation, together with the audit evidence obtained
relevant to management’s response, is not considered adequate.

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1.22 - SA 530 “Audit Sampling”
Q.96 Write short note on: Statistical and Non-Statistical Sampling.
[May 12 (4 Marks)]
Answer: Statistical Sampling and Non-Statistical Sampling:
Statistical Sampling
(i) Statistical sampling has the following characteristics:
• Random selection of the sample items; and
• The use of probability theory to evaluate sample results,
including measurement of sampling risk.
(ii) This method is more scientific as it involves use of laws of
probability.
(iii)This method has reasonably wide application where a
population consists of a large number of similar items.
Non-Statistical Sampling
(i) A sampling approach that does not have characteristics of
random selection and use of probability theory is
considered as non-statistical sampling.
(ii) In this method, the sample size and its composition are
determined on the basis of personal experience and
knowledge of the auditor.
(iii)This method because of its simplicity in operation was in
common application for many years.

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Q.97 Write short note on: Sampling Risk.
or
While planning the audit of S Ltd. you want to apply sampling
techniques. What are the risk factors you should keep in mind?
[May 10 (4 Marks)]
Answer: Risk Factors while Sampling technique:
• SA 530deals with the auditor’s use of statistical and non-
statistical sampling when designing and selecting the audit
sample, performing tests of controls and tests of details, and
evaluating the results from the sample.
• While using sampling technique, auditor’s conclusion based
on a sample may be different from the conclusion if the
entire population were subjected to the same audit
procedure. This is known as sampling risk.
• Sampling risk can lead to two types of erroneous
conclusions:
1. In the case of a test of controls, that controls are more
effective than they actually are, or in the case of a test of
details, that a material misstatement does not exist when
in fact it does.
The auditor is primarily concerned with this type of
erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an
inappropriate audit opinion.

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2. In the case of a test of controls, that controls are less
effective than they actually are, or in the case of a test of
details, that a material misstatement exists when in fact it
does not.
This type of erroneous conclusion affects audit efficiency as it
would usually lead to additional work to establish that initial
conclusions were incorrect.
Q.98 Write short note on: Tolerable Misstatement. [May 14 (4 Marks)]
Or
What is tolerable misstatement and tolerable rate of deviation.
[May 17 (4 Marks)]
Answer: Tolerable Misstatement:

• A monetary amount set by the auditor in respect of which
the auditor seeks to obtain an appropriate level of assurance
that the monetary amount set by the auditor is not exceeded
by the actual misstatement in the population.
• When designing a sample, the auditor determines tolerable
misstatement in order to address the risk that the aggregate
of individually immaterial misstatements may cause the
financial statements to be materially misstated and provide a
margin for possible undetected misstatements.
• Tolerable misstatement is the application of performance
materiality, as defined in SA 320, to a particular sampling
procedure. Tolerable misstatement may be the same amount
or an amount lower than performance materiality.

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Tolerable Rate of Deviation:

Rate of deviation from prescribed internal control procedures set
by the auditor in respect of which the auditor seeks to obtain an
appropriate level of assurance that the rate of deviation set by the
auditor is not exceeded by the actual rate of deviation in the
population.

Many candidates wrongly mixed up Material misstatement with Tolerable
Misstatement. Answers were general in natureand many candidates failed to narrate
the Tolerable misstatement and Tolerable rate of deviation.
Q.99 Discuss the following: With reference to SA 530, meaning of audit
sampling and requirements relating to sample design, sample size &
selection of items for testing.
Answer: Meaning of Audit Sampling, Sample Design, Sample Size and
Selection of items for testing:
Audit Sampling: Application of audit procedures to less than
100% of items within a population of audit relevance such that
all sampling units have a chance of selection in order to provide
the auditor with a reasonable basis on which to draw
conclusions about the entire population is known as audit
sampling.
Requirement of SA 530 as to Sample Design, Size and
Selection of Items for Testing

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(i) When designing an audit sample, the auditor shall consider
the purpose of the audit procedure and the characteristics
of the population from which the sample will be drawn.
(ii) The auditor shall determine a sample size sufficient to
reduce sampling risk to an acceptably low level.
(iii) The auditor shall select items for the sample in such a way
that each sampling unit in the population has a chance of
selection.
Q. 100 “In cases where audit sample selection has been done on a random
basis, no statistical process for selection of samples needs to be
followed”. Comment.
Answer: Selection of Samples on random basis:
• As per SA 530 “Audit Sampling” sampling means application
of audit procedures to less than 100% of items within a
population of audit relevance such that all sampling units
have a chance of selection in order to provide the auditor
with a reasonable basis on which to draw conclusions about
the entire population.
• Statistical sampling is an approach to sampling that has the
following characteristics:
(i) Random selection of the sample items; and
(ii) The use of probability theory to evaluate sample results,
including measurement of sampling risk.

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• Essential features of statistical sampling are random
selection and use of probability theory. Examples of
Statistical sampling are Random selection, Systematic
Selection and Monetary Unit Sampling.
• Audit sample collection on a random basis ensures that all
items within a population have an equal chance of selection
by the use of random number tables or random number
generators. This method is considered appropriate provided
the population to be sampled consists of reasonably similar
units and false within a reasonable range.
Conclusion: For application of statistical sampling techniques,
one of the prerequisite is selection on random basis, hence in
case of selection of an audit sample on random basis, no other
statistical process for selection of samples need to be followed.
Q. 101 “An Auditor while analyzing the errors in a sample need not
consider the qualitative aspects of errors detected.” Comment.
Answer: Consideration of Qualitative Aspects of Errors:

• SA 530 “Audit Sampling” requires the auditor to evaluate the
results of the sample and determine whether the use of audit
sampling has provided a reasonable basis for conclusions
about the population that has been tested.
• If any error or misstatement identified, auditor shall
investigate its nature and cause, and evaluate their possible
effect on the purpose of the audit procedure and on other
areas of the audit.

Page 155
• In analysing the deviations and misstatements identified, the

auditor would also need to consider the qualitative aspects of
the misstatements identified by him.
• While evaluating the misstatements, auditor may observe
that many have a common feature, for example, type of
transaction, location, product line or period of time. In such
circumstances, the auditor may decide to identify all items in
the population that possess the common feature, and extend
audit procedures to those items. In addition, such deviations
or misstatements may be intentional, and may indicate the
possibility of fraud.
Conclusion: The statement that an auditor while analysing the
errors in a sample need not consider the qualitative aspects of
errors detected is not correct, as he is required to investigate
the nature and causes of the errors identified.
Q. 102 Describe the Principal methods of selection of sample.
[Nov. 14 (4 Marks)]
Or
The auditor should select sample items in such a way that the
sample can be expected to be representative of the population.
Comment. [May 17 (5 Marks)]
Or
In the course of your audit assignment of Indraprastha Ltd., you
want to guide your audit assistants in selecting sample items in such
a way that sample can be expected to be representative of the

Page 156
population and all items have an opportunity of being selected.
Guide your assistants with principal methods of collecting sample.
Answer: Principal Methods of Selection of Samples:
As per SA 530 “Audit Sampling” principal methods of selection
of samples are:
1. Random selection: This method of sampling ensures that
all items within a population stand an equal chance of
selection by the use of random number tables or random
number generators. The sampling units could be physical
items, such as sales invoices or monetary units.
2. Systematic selection: The number of sampling units in the
population is divided by the sample size to give a sampling
interval, for example 50, and having determined a starting
point within the first 50, each 50th sampling unit thereafter is
selected.
3. Monetary Unit Sampling: It is a type of value-weighted
selection in which sample size, selection and evaluation
results in a conclusion in monetary amounts.
4. Haphazard selection: Samples are selected without
following a structured technique. Although no structured
technique is used, the auditor would nonetheless avoid any
conscious bias or predictability. Haphazard selection is not
appropriate when using statistical sampling.

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5. Block selection: It involves selection of a block(s) of
contiguous items from within the population. Block selection
cannot ordinarily be used in audit sampling because most
populations are structured such that items in a sequence can
be expected to have similar characteristics to each other, but
different characteristics from items elsewhere in the
population.
Q. 103 Write short note on: Haphazard Sampling.
Answer: Haphazard Sampling:
• SA 530 “Audit Sampling” recognises haphazard sampling as
one of the sample selection method in which samples are
selected without following a structured technique.
• Although no structured technique is used, the auditor would
nonetheless avoid any conscious bias or predictability (for
example, avoiding difficult to locate items, or always choosing
or avoiding the first or last entries on a page) and thus
attempt to ensure that all items in the population have a
chance of selection.
• It may be accepted as alternative to random sampling,
provided the auditor attempts to draw a representative
sample from the population without any biasness.
• Haphazard selection is not appropriate when using statistical
sampling.

Page 158
Q. 104 Write short note on: Block Selection.
Answer: Block Selection:
• SA 530 “Audit Sampling” recognises block selection as one of
the sample selection method in which samples are selected
without following a structured technique.
• It involves selection of a block(s) of contiguous items from
within the population.
• Block selection cannot ordinarily be used in audit sampling
because most populations are structured such that items in a
sequence can be expected to have similar characteristics to
each other, but different characteristics from items elsewhere
in the population.
• In some circumstances, it may be an appropriate audit
procedure to examine a block of items, it would rarely be an
appropriate sample selection technique when the auditor
intends to draw valid inferences about the entire population
based on the sample.
Q.105 Describe the principal method of design of the samples and its
evaluation. [May 17 (4 Marks)]
Answer: Principal Method of Design of Samples:

SA 530 “Audit Sampling” deals with the auditor’s use of
statistical and non-statistical sampling when designing and
selecting the audit sample, performing tests of controls and
tests of details, and evaluating the results from the sample.

Page 159
Among both methods of designing (Statistical and non-

statistical), principal method of design of sample is statistical
sampling.
Statistical sampling involves random selection of the sample
items and use of probability theory to evaluate sample results,
including measurement of sampling risk. This method is more
scientific as it involves use of laws of probability. This method
has reasonably wide application where a population consists of
a large number of similar items.
While applying statistical sampling, auditor may also apply
stratification, i.e the process of dividing a population into sub-
populations, each of which is a group of sampling units which
have similar characteristics (often monetary value).
Evaluation of Sampling Results:
• SA 530 “Audit Sampling” requires the auditor to evaluate the

results of the sample and determine whether the use of audit
sampling has provided a reasonable basis for conclusions
about the population that has been tested.
• If any error or misstatement identified, auditor shall

investigate its nature and cause, and evaluate their possible
effect on the purpose of the audit procedure and on other
areas of the audit.
• In analysing the deviations and misstatements identified, the

auditor would also need to consider the qualitative aspects of
the misstatements identified by him.

Page 160

Majority of the candidates seem not to have understood the requirement of the question on the
aspects to be considered by auditor in designing the sample and evaluating the results; rather
their answers were concentrated mainly on the principal methods of sampling.
1.23 - SA 540 “Auditing Accounting Estimates, Including Fair Value
Accounting Estimates and Related Disclosures”
Q.106 “Accounting estimate means an approximation of a monetary
amount in the absence of a precise means of measurement”. Discuss
explaining the accounting estimates according to SA-540.
Answer: Accounting Estimates:
SA 540 “Auditing Accounting Estimates, including Fair Value
Accounting Estimates and Related Disclosures” defines an
accounting estimate as “an approximation of a monetary amount
in the absence of a precise means of measurement”. This term is
used for an amount measured at fair value where there is
estimation uncertainty. The degree of estimation uncertainty
affects the risks of material misstatement of accounting
estimates.
Examples of Accounting Estimates:
1. Allowance for doubtful accounts.
2. Inventory obsolescence.
3. Warranty obligations.
4. Depreciation method or asset useful life.
5. Provision against the carrying amount of an investment.

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6. Outcome of long term contracts.
7. Financial Obligations/ Costs arising from litigation
settlements and judgments.
Examples of Fair Value Accounting Estimates:
1. Complex financial instruments, which are not traded in an
active and open market.
2. Share-based payments.
3. Property or equipment held for disposal.
4. Certain assets or liabilities acquired in a business
combination, including goodwill and intangible assets.
5. Transactions involving the exchange of assets or liabilities
between independent parties without monetary
consideration.
Q.108 During the audit of Data Solutions Ltd., a listed company, your audit
manager observed that several estimates are made by the Company.
He seeks your guidance to know areas of accounting estimates that
may give rise to lower level of risk of material misstatement. Guide
him with examples. [Nov. 19 – Old Syllabus (5 Marks)]
Answer: Areas of accounting estimates that may give rise to lower
level of risk of material misstatement:

Page 162
estimates.
Some accounting estimates involve relatively low estimation
uncertainty and may give rise to lower risks of material
misstatements, for example:
(a) Accounting estimates arising in entities that engage in
business activities that are not complex.
(b) Accounting estimates that are frequently made and updated
because they relate to routine transactions.
(c) Accounting estimates derived from data that is readily
available, such as published interest rate data or exchange-
traded prices of securities. Such data may be referred to as
“observable” in the context of a fair value accounting
estimate.
(d) Fair value accounting estimates where the method of
measurement prescribed by the applicable financial
reporting framework is simple and applied easily to the
asset or liability requiring measurement at fair value.
(e) Fair value accounting estimates where the model used to
measure the accounting estimate is well-known or generally
accepted, provided that the assumptions or inputs to the
model are observable.

Page 163
Q.107 “Some accounting estimates involve relatively low estimation
misstatements whereas for some accounting estimates there may be
relatively high estimation uncertainty particularly where they are
based on significant assumptions”. Explain by giving examples.
Or
With reference to the Standards on Auditing state the example of
accounting estimates that may have a high estimation uncertainty.
[Nov. 16 (5 Marks)]
Answer: Examples of accounting Estimates having high estimation
uncertainty:
Accounting Estimates and related disclosures” defines an
estimates.
Some accounting estimates involve relatively low estimation
misstatements. For some accounting estimates, however, there
may be relatively high estimation uncertainty, particularly
where they are based on significant assumptions, for example:

Page 164
1. Accounting estimates relating to the outcome of litigation.
2. Fair value accounting estimates for derivative financial
instruments not publicly traded.
3. Fair value accounting estimates for which a highly specialised
entity-developed model is used or for which there are
assumptions or inputs that cannot be observed in the
marketplace.
Additional Examples of Fair Value Accounting Estimates are:
1. Complex financial instruments, which are not traded in an
active and open market.
2. Share-based payments.
3. Property or equipment held for disposal.
4. Certain assets or liabilities acquired in a business
combination, including goodwill and intangible assets.
5. Transactions involving the exchange of assets or liabilities
between independent parties without monetary
consideration.
Q.108 While auditing Z Ltd., you observe certain material financial
statement assertions have been based on estimates made by the
management. As the auditor how do you minimize the risk of
material misstatements? [May 11 (6 Marks)]
Answer: Evaluation of financial statement assertions based on
management estimates:

Page 165
As per SA 540 “Auditing Accounting Estimates, including Fair

Value Accounting Estimates” auditor shall obtain an
understanding of the following in order to identify and assess the
risks of material misstatement for accounting estimates:
(a) The requirements of the applicable FRF relevant to

accounting estimates.
(b) How management identifies those transactions, events and
conditions that may give rise to the need for accounting
estimates.
In obtaining this understanding, the auditor shall make
inquiries of management about changes in circumstances
that may give rise to new, or the need to revise existing
accounting estimates.
(c) The estimation making process adopted by the
management including:
(a) The method, including where applicable the model used

in making the accounting estimates.
(b) Relevant controls
(c) Whether management has used an expert.
(d) Assumptions underlying the accounting estimates.
(e) Whether there has been or ought to have been a change
from the prior period in the methods for making the
accounting estimates, and if so why.
(f) Whether and if so, how the management has assessed
the effect of estimation uncertainty.

Page 166
(d) The auditor shall review the outcome of accounting
estimates included in the prior period financial statements.
Q.109 A Pvt Ltd is engaged in the business of real estate. The auditor of the
company requested the information from the management to review
the outcome of accounting estimates (like estimated costs
considered for percentage completion etc) included in the prior
period financial statements and their subsequent re-estimation for
the purpose of the current period.
The management has refused the information to the auditor saying
that the review of prior period information should not be done by the
auditor. Please advise. [RTP-May 19]
Answer: Review of outcome of Accounting Estimates:
• SA 540 “Auditing Accounting Estimates, including Fair Value

Accounting Estimates and Related Disclosures” requires the
auditor to review the outcome of accounting estimates
included in the prior period financial statements, or, where
applicable, their subsequent re-estimation for the purpose of
the current period.
• The nature and extent of the auditor’s review takes account of

the nature of the accounting estimates, and whether the
information obtained from the review would be relevant to
identifying and assessing risks of material misstatement of
accounting estimates made in the current period financial
statements.

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• However, the review is not intended to call into question the

judgments made in the prior periods that were based on
information available at that time.
• The outcome of an accounting estimate will often differ from
the accounting estimate recognised in the prior period
financial statements. By performing risk assessment
procedures to identify and understand the reasons for such
differences, the auditor may obtain:
(a) Information regarding the effectiveness of management’s
prior period estimation process, from which the auditor
can judge the likely effectiveness of management’s current
process.
(b) Audit evidence that is pertinent to the re-estimation, in the
current period, of prior period accounting estimates.
(c) Audit evidence of matters, such as estimation uncertainty,
that may be required to be disclosed in the financial
statements.
• The review of prior period accounting estimates may also

assist the auditor, in the current period, in identifying
circumstances or conditions that increase the susceptibility of
accounting estimates to, or indicate the presence of, possible
management bias. The auditor’s professional skepticism
assists in identifying such circumstances or conditions and in
determining the nature, timing and extent of further audit
procedures.

Page 168
Q.110 What are the factors that may influence the degree of estimation
uncertainty associated with an accounting estimate?
Answer: Factors Influencing Degree of Estimation Uncertainty:
estimates.
The degree of estimation uncertainty associated with an
accounting estimate may be influenced by factors such as-
(i) The extent to which the accounting estimate depends on
judgment.
(ii) The sensitivity of the accounting estimate to changes in
assumptions.
(iii) The existence of recognised measurement techniques that
may mitigate the estimation uncertainty (though the
subjectivity of the assumptions used as inputs may
nevertheless give rise to estimation uncertainty).
(iv) The length of the forecast period, and the relevance of data
drawn from past events to forecast future events.
(v) The availability of reliable data from external sources.

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(vi) The extent to which the accounting estimate is based on
observable or unobservable inputs.
Q.137 Mr. L while conducting the audit of ABC Ltd., observed that a
substantial amount is recognized in respect of obsolescence of
inventory and warranty obligation in the financial statements. Mr. L
wants to obtain written representation from the management to
determine whether the assumptions and estimates used are
reasonable.
Guide Mr. L with reference to the relevant Standard on Auditing.
Answer: Written Representations as to Accounting Estimates:
• SA 540 “Auditing Accounting Estimates, Including Fair Value
auditor to obtain written representations from the
governance whether they believe significant assumptions
used in making accounting estimates are reasonable.
• SA 580 “Written Representations” discusses the use of written
representations. Depending on the nature, materiality and
extent of estimation uncertainty, written representations
about accounting estimates recognised or disclosed in the
financial statements may include representations:

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(a) About the appropriateness of the measurement processes,
including related assumptions and models, used by
management in determining accounting estimates in the
context of the applicable FRF, and the consistency in
application of the processes.
(b) That the assumptions appropriately reflect management’s
intent and ability to carry out specific courses of action on
behalf of the entity, where relevant to the accounting
estimates and disclosures.
(c) That disclosure related to accounting estimates are
complete and appropriate under the applicable FRF.
(d) That no subsequent event requires adjustment to the
accounting estimates and disclosures included in the
1.24 - SA 550 “Related Parties”
Q.111 Elaborate how the statutory auditor can verify the existence of
related parties for the purpose of reporting under AS 18.
Or
As a statutory auditor, how do you verify the existence of related
parties and disclosures of related party transactions.
[Nov. 09 (8 Marks)]

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Or
In the course of audit of Q Ltd, its statutory auditor wants to be sure of
the adequacy of related party disclosures? Kindly guide the auditor in
identifying the possible source of related party information.
[May 12 (8 Marks), MTP-Oct.18]
Or
As an Auditor, how will you verify the existence of related parties.
[Nov. 12 (8 Marks)]
Or
JY & Co. is appointed as auditor of Breeze Ltd. JY & Co. seeks your
guidance for reviewing the records and documentation of the
company regarding ‘related party transactions in the normal course
of business’. Describe the steps to be followed.
[Nov. 15 (4 Marks), MTP-March 19]
Or
The financial statements of Beta Ltd. have been prepared by the
Management with due disclosures for related parties and
transactions with them. However, as the auditor of the Company, you
are not sure of the reliability of the said disclosures. Mention the
documents and records that may be helpful in gathering information
about related party relationships and transactions.
[Nov. 19 – Old Syllabus (5 Marks)]

Page 172
Answer: Possible sources of related Party Information:
• As per SA 550 “Related Parties” the auditor shall remain alert,
when inspecting records or documents with respect to
arrangements or information indicating the existence of
related party relationships or transactions, not previously
identified or disclosed to the auditor.
• During the audit, the auditor may inspect records or
documents that may provide information about related party
relationships and transactions, for example:
1. Entity income tax returns.
2. Information supplied by the entity to regulatory
authorities.
3. Shareholder registers to identify the entity’s principal
shareholders.
4. Statements of conflicts of interest from management and
TCWG.
5. Records of the entity’s investments and those of its
pension plans.
6. Contracts and agreements with key management or
TCWG.
7. Significant contracts and agreements not in the entity’s
ordinary course of business.
8. Specific invoices and correspondence from the entity’s
professional advisors.

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9. Life insurance policies acquired by the entity.
10. Significant contracts re-negotiated by the entity during the
period.
11. Internal auditors’ reports.
12. Documents associated with the entity’s filings with a
securities regulator (for example, prospectuses).
• Auditor should also obtain further information on significant
transactions outside the entity’s normal course of business. It
enables him to evaluate whether fraud risk factors, if any, are
present.
• In addition, the auditor needs to be alert for transactions
which appear unusual in the circumstances and which may
indicate the existence of previously unidentified related
parties. For example: Complex equity transactions such as
corporate restructurings or acquisitions, transactions with
offshore entities in jurisdictions with weak corporate laws, the
leasing of premises etc.
• Finally, the auditor should also obtain a written representation
from the management concerning the completeness of
information provided regarding the identification of related
parties.
Examinees did not write about the inspection of various records or documents that
mayprovide information about related party relationships and transactions. Many
examinees wroteabout related parties transactions and its reporting requirements
rather than how to find these.

Page 174
Q.112 A statutory auditor is required to follow the procedures so as to
identify the risk of material misstatement associated with related
parties. What are the auditor’s duties when he identifies related
parties or related party transactions that management not previously
disclosed to him?
Answer: Verification of existence of related parties:
SA 550 “Related Parties” requires the auditor to perform
procedures so as to identify the risk of material misstatement
associated with related parties. Accordingly, auditor should
perform the following:
(a) Inquire the management regarding
• Identity of entity’s Related Party, changes from prior
period.
• Nature of relationships between entity and Related Party.
• Type & purpose of transactions with Related Party during
the period.
(b) The auditor shall remain alert, when inspecting records or
documents, for arrangements or other information that may
indicate the existence of related party relationships or
transactions that management has not previously identified
or disclosed to the auditor.
(c) If the auditor identifies related parties or significant related
party transactions that management has not previously
identified or disclosed to the auditor, the auditor shall:

Page 175
(i) Promptly communicate the relevant information to the
other members of the engagement team;
(ii) Where the applicable FRF establishes related party
requirements:
• Request management to identify all transactions with
the newly identified related parties for the auditor’s
further evaluation; and
• Inquire as to why the entity’s controls over related
party relationships and transactions failed to enable
the identification or disclosure of the related party
relationships or transactions;
(iii)Perform appropriate substantive audit procedures
relating to such newly identified related parties or
significant related party transactions;
(iv) Reconsider the risk that other related parties or
significant related party transactions may exist that
management has not previously identified or disclosed to
the auditor, and perform additional audit procedures as
necessary; and
(v) If the non-disclosure by management appears intentional
(and therefore indicative of a risk of material
misstatement due to fraud), evaluate the implications for
the audit.

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Q.113 In the course of your audit you have come across a related party
transaction which prima facie appears to be biased. How would you
deal with this? [Nov. 14 (4 marks)]
Answer: Related Parties:
As per SA 550 on, “Related Parties”, the auditor should review
information provided by the management of the entity
identifying the names of all known related parties and for this
purpose, he may inspect records or documents that may provide
information about related party relationships and transactions.
In this case, the auditor is finding a related party transaction
which prima facie appears to be biased. So, the auditor is
required to confirm the same. For identified significant related
party transactions outside the entity’s normal course of business,
the auditor shall inspect the underlying contracts or agreements,
if any, and evaluate whether:
(i) The business rationale (or lack thereof) of the transactions
suggests that they may have been entered into to engage in
fraudulent financial reporting or to conceal
misappropriation of assets,
(ii) The terms of the transactions are consistent with
management’s explanations; and
(iii) The transactions have been appropriately accounted for and
disclosed in accordance with the applicable financial
reporting framework.

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The auditor should also obtain audit evidence that the
transactions have been appropriately authorised and approved.
Conclusion: If the auditor concludes that the related party
transaction is biased, he should report that the related party
relationships and transactions prevent the financial statements
from achieving true and fair presentation.
1.25 - SA 560 “Subsequent Events”
Q.114 Briefly Explain: Audit procedures on subsequent events.
[Nov. 09 (4 Marks)]
Or
Briefly describe auditor’s responsibility regarding subsequent events.
Answer: Audit Procedures on subsequent Events:
• SA 560 “Subsequent Events” deals with the auditor’s

responsibilities relating to subsequent events in an audit of
• As per SA 560 the term, Subsequent Events may be defined as
the events occurring between the dates of balance sheet and
audit report and the facts that become known to the auditor
after the date of the auditor’s report.
• The auditor shall perform audit procedures designed to
obtain sufficient appropriate audit evidence that all events
occurring between the date of the financial statements and
the date of the auditor’s report that require adjustment of, or
disclosure in, the financial statements have been identified.

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• The auditor’s procedures on subsequent events shall include
the following:
(a) Obtaining an understanding of the procedures through
which management has identified subsequent events.
(b) Inquiring of management and, TCWG as to occurrence of
subsequent events which might affect the financial
statements.
(c) Reading minutes of management & TCWG meetings that
have been held after the date of the financial statements.
(d) Reading the entity’s latest subsequent interim financial
statements, if any.
• When, as a result of the procedures performed as required
the auditor identifies events that require adjustment of, or
disclosure in, the financial statements, the auditor shall
determine whether each such event is appropriately reflected
in those financial statements.
Q.115 Enquiry from management is helpful for auditor to evaluate
subsequent events. Discuss specific enquiries in reference of SA 560,
which might have effect on the financial statements.
Or
M/s LMP Associates, Chartered Accountants while conducting the
audit of PQR Ltd want to conduct an inquiry of management and
those charged with governance as to whether any subsequent events
have occurred which might affect the financial statements. Guide M/s

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LMP Associates with the matters where specific enquiry may be
conducted to evaluate subsequent events.
Answer: Specific Inquiries having effect on the financial statements:
SA 560 “Subsequent Events” deals with the auditor’s
responsibilities relating to subsequent events in an audit of
financial statements. SA 560 requires from the auditor to
conduct inquiry of management and, where appropriate, TCWG
as to whether any subsequent events have occurred which
might affect the financial statements. The matters where specific
inquiry may be conducted are as listed below:
1. Whether new commitments, borrowings or guarantees have
been entered into.
2. Whether sales or acquisitions of assets have occurred or are
planned.
3. Whether there have been increases in capital or issuance of
debt instruments, such as the issue of new shares or
debentures, or an agreement to merge or liquidate has been
made or is planned.
4. Whether any assets have been appropriated by government
or destroyed, for example, by fire or flood.
5. Whether there have been any developments regarding
contingencies.

Page 180
6. Whether any unusual accounting adjustments have been
made or are contemplated.
7. Whether any events have occurred or are likely to occur that
will bring into question the appropriateness of accounting
policies used in the financial statements, as would be the
case, for example, if such events call into question the
validity of the going concern assumption.
8. Whether any events have occurred that are relevant to the
measurement of estimates or provisions made in the
9. Whether any events have occurred that are relevant to the
recoverability of assets.
Q.116 Comment on the following: A Co. Ltd. has not included in the Balance
Sheet as on 31-03-2019 a sum of Rs. 1.50 crores being amount in the
arrears of salaries and wages payable to the staff for the last 2 years
as a result of successful negotiations which were going on during the
last 18 months and concluded on 30-04-2019. The auditor wants to
sign the said Balance Sheet and give the audit report on 31-05-2019.
The auditor came to know the result of the negotiations on 15-05-
2019. [Nov. 10 (5 Marks)]

Page 181
Answer: Treatment of subsequent Events:
• SA 560 “Subsequent Events” requires that in respect of
events occurring between the date of F.S. and date of the
Audit Report, the auditor shall perform audit procedures to
obtain sufficient & appropriate audit evidence to ensure that
events which require adjustments or disclosure in the F.S.
have been identified.
• If auditor identifies events that require adjustment or
disclosure in the F.S., the auditor should determine whether
each such event is appropriately reflected in the F.S.
• The auditor shall request the management to provide a
“Written Representation” that all events occurring
subsequent to the date of the F.S. and requires adjustment or
disclosure have been adjusted or disclosed.
• In the instant case, the amount of Rs. 1.50 crores are a
material amount and it is the result of an event, which has
occurred after the Balance Sheet date. As per the provisions
of AS-4 and AS-29, the obligation requires provision for
outstanding expenses.
Conclusion: The facts of the case indicates the event as of
adjusting nature as per AS–4 “Contingencies and Events
Occurring after the Balance Sheet date” and requires adjustment
in assets and liabilities, which has not been made by the
management. Auditor should request management to adjust the

Page 182
sum of Rs. 1.50 crores by making provision for expenses. If the
management does not accept the request the auditor should
qualify the Audit Report.
Q.117 As a statutory auditor of a company, comment on the following: A
fire broke out on 15th May, 2019, in which material worth Rs. 50
lakhs which was lying in inventory since 1st March, 2019 was totally
destroyed. The financial statements of the company have not been
adopted till the date of fire. The management of the company argues
that since the loss occurred in the year, 2019-20, no provision for the
loss needs to be made in the financial statements for 2018-19.
[Nov. 12 (5 Marks)]
Answer: Event Occurring after the Balance Sheet Date:
• As per AS- 4 on 'Contingencies and Events Occurring After the
Balance Sheet Date', assets and liabilities should be adjusted
for events occurring after the balance sheet date that provide
additional evidence to assist the estimation of amounts
relating to conditions existing at the balance sheet date or that
indicate that the fundamental accounting assumption of going
concern is not appropriate.
• AS – 4 also requires disclosure of the non-adjusting event, in
the report of approving authority.
• Further as per SA 560 “Subsequent Events” the auditor should
ensure that all events occurring subsequent to the date of
financial statements and for which applicable financial

Page 183
reporting framework requires adjustment or disclosure have
been adjusted or disclosed.
• In the instant case, fire took place after the close of the
accounting year and does not relate to conditions existing at
the balance sheet date.
Conclusion: The event will have no impact on items appearing
at the Balance Sheet date and hence not required any
adjustment, subject to satisfaction in respect of non-violation of
going concern concept. Hence management is correct by not
providing provision. However, auditor is required to ensure the
proper disclosure in report of approving authority.
Q.118 Amudhan & Co., are the Auditors of XYZ Company Ltd., for the year
ended on 31/03/2019. The Audit Report for that year was signed by
the Auditors on 04/05/2019. The Annual General Meeting was
decided to be held during the month of August 2019. On
06/05/2019, the Company had received a communication from the
Central Government that an amount of Rs. 5800 crore kept pending
on account of incentives pertaining to Financial Year 2018-19 had
been approved and the amount would be paid to the Company before
the end of May 2019. To a query to Chief Financial officer of the
company by the board, it was informed that this amount had not
been recognised in the Audited Financial Statements in view of the
same not being released before the close of the financial year and
due to uncertainty of receipt. Now, having received the amount, the

Page 184
board of Directors wished to include this amount in the Financial
Statements of the company for the Financial Year ended on
31.03.2019. On 08.05.2019, the Board amended the accounts,
approved the same and requested the Auditor to consider this event
and issue a fresh Audit Report for the year ended on 31.03.2019.
Analyse the issues involved and give your views as to whether or not
the Auditor could accede to the request of the Board of Directors.
Answer: Event Occurring after the Balance Sheet Date:
(a) Issues Involved:
1. Whether the Financial statements can be amended after
the signing of audit report, but before being issued to
stakeholders.
2. What are the disclosure requirements if the financial
statements are amended after the signing of the audit
report?
3. What are the auditor’s duties if the financial statements
are revised after signing the audit report?
(b) Reposes to issues:
• As the audit report was signed on 04.05.2019 and
financial statements amended on 08.05.2019, it appears
that financial statements are not yet been issued to
stakeholders. Hence, financial statements may be
amended so as to incorporate any significant event which

Page 185
provide evidence of conditions that existed at the end of
the reporting period, in accordance with Ind-AS 10
“Events after the Reporting period”.
• As required by Ind-AS 10, entity shall disclose the date
when the financial statements were approved for issue
and who gave that approval. If the entity’s owners or
others have the power to amend the financial statements
after issue, the entity shall disclose that fact.
• As per SA 560, “Subsequent Events”, the auditor has no
obligation to perform any audit procedures regarding the
financial statements after the date of the auditor’s report.
However, when, after the date of the auditor’s report but
before the date the financial statements are issued, a fact
becomes known to the auditor that, had it been known to
the auditor at the date of the auditor’s report, may have
caused the auditor to amend the auditor’s report, the
auditor shall
(i) Discuss the matter with management and, where
appropriate, those charged with governance.
(ii) Determine whether the financial statements need
amendment and, if so,
(iii) Inquire how management intends to address the
matter in the financial statements.

Page 186
• As per SA 560 “Subsequent Events, if management
amends the financial statements, the auditor shall:
(a) Extend the audit procedures to the date of the new
auditor’s report; and
(b) Provide a new auditor’s report on the amended
• It is also provided in SA 560 that when law, regulation or
FRF does not prohibit management from restricting the
amendment of financial statements to the effect of
subsequent events, auditor is permitted to restrict the
audit procedures on subsequent events to that
amendment. In such case, the auditor shall:
(a) Amend the Audit report to include an additional date
restricted to that amendment.
(b) Provide a new or amended Audit Report that includes
Emphasis of Matter/Other matter Para that conveys
that auditor’s procedures on subsequent event are
restricted solely to amendments of financial
statements.

Page 187
1.26 - SA 570 “Going Concern”
Q.119 ABC Company files a law suit against Unlucky Company for Rs. 5
crores. The Attorney of Unlucky Company feels that the suit is without
merit, so Unlucky Company merely discloses the existence of the law
suit in the notes accompanying its financial statements. As an auditor
of Unlucky Company, how will you deal with the situation?
[May 14 (5 Marks)]
Answer: Evaluating appropriateness of going concern assumption:
• AS 29 "Provisions, Contingent liabilities and Contingent
Assets", requires that if any future event may cause a possible
obligation, a provision should be made in the accounts to
recognize the obligation where there is sufficient evidence that
the event will occur.
• SA 570 “Going Concern”requires that the auditor shall consider
whether there are events or conditions that may cast
significant doubt on the entity’s ability to continue as a going
concern. Pending legal or regulatory proceedings against the
entity that may, if successful, result in claims that the entity is
unlikely to be able to satisfy is one of the example of such
event.
• When the auditor concludes that the use of the going concern
assumption is appropriate in the circumstances but a material
uncertainty exists, the auditor shall determine whether the
financial statements adequately describe the principal events

Page 188
or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern and management’s plans
to deal with these events or conditions.
• In the instant case, ABC Company has filed a law suit against
Unlucky Company for Rs. 5 crores. The attorney of Unlucky
Company feels that the suit is without merit, so the company
merely discloses the existence of law suit in the notes
accompanying its financial statements.
Conclusion: Auditor should evaluate the source data on which
basis the opinion is formed and evaluate the appropriateness of
use of going concern assumption. If the auditor finds the
uncertainty, he may request the management to adjust the sum
of Rs. 5 crore by making provision for expenses as per AS 29. If
the management does not accept the request the auditor should
qualify the audit report.
Q.120 A Company's net worth is eroded and creditors are unpaid due to
liquidity constraints. The management represents to the statutory
auditor that the promoter's wife is expected to give an unsecured loan
to meet the liquidity constraints and that negotiations are underway
to secure large export orders. [May 09 (4 Marks)]
Answer: Appropriateness of Going Concern Assumption:
• SA 570 “Going Concern” requires that the auditor shall
consider whether there are events or conditions that may cast

Page 189
concern. Eroded net worth and nonpayment to creditors are
one of the examples of such event.
• As per SA 570, when events or conditions have been identified
that may cast significant doubt on the entity’s ability to
continue as a going concern, the auditor shall obtain sufficient
appropriate audit evidence to determine whether or not a
material uncertainty exists through performing additional
audit procedures, including consideration of mitigating factors.
• In the present case, it is subjective, but prima-facie a mere
expectation of future cash flows from the promoter’s wife
without any firm commitment and the possibility of an export
order being negotiated, may not that be sufficient appropriate
audit evidence of mitigating factors for resolving the going
concerns question under SA 570 “Going Concern”.
Conclusion: Based on the results of evaluation of
appropriateness of going concern assumption, auditor is
required to modify the opinion.
Q.121 R & Co. is the statutory auditor of S Ltd. for the financial year ended
on 31st March 2020, S Ltd had disclosed in the notes (Note No. X) “The
state pollution control board had ordered the closure of the
company’s only manufacturing plant on the ground that it is
environmentally damaging, which the company had challenged in a
law suit. Pending the outcome of the law suit the financial statements
are prepared on a going concern basis”. Further the financial

Page 190
statements prepared by the management of S Ltd include financial
statements of certain branches which are audited by other auditors.
What are the reporting responsibilities of R & Co?
[May 12 (10 Marks)]
Answer: Reporting responsibilities of Auditor:
(A)Evaluation of appropriateness of Going Concern
Assumption:
• As per SA 570 “Going Concern” auditor is required to
obtain sufficient appropriate audit evidence about the
appropriateness of management use of going concern
assumption in the preparation and presentation of
financial statements and to conclude whether there is a
material uncertainty about the entity’s ability to continue
as a going concern.
• When the auditor concludes that the use of the going
concern assumption is appropriate in the circumstances
but a material uncertainty exists, the auditor shall
determine whether the financial statements:
(a) Adequately describe the principal events that may cast
significant doubt on the entity’s ability to continue as a
going concern and management’s plans to deal with
these events or conditions; and

Page 191
(b) Disclose clearly that there is a material uncertainty
related to going concern and, therefore, that it may be
unable to realize its assets and discharge its liabilities
in the normal course of business.
• If adequate disclosure is made in the financial statements,
the auditor shall express an unmodified opinion and the
auditor’s report shall include a separate section under the
heading “Material Uncertainty Related to Going
Concern”.
Conclusion: In the present case, as disclosure is given in
financial statements, R & Co. should include a separate
section under the heading “Material Uncertainty Related
to Going Concern”.
(B) Reporting of Branches audited by other auditors:
• As per SA 600 “Using the work of Another Auditor”, when
the principal auditor has to base his opinion on the
financial information of an entity as a whole relying upon
the statements and reports of the other auditors, his
report should state clearly the division of responsibility
for the financial information of the entity by indicating the
extent to which the financial information of components
audited by the other auditors have been included in the
financial information of the entity.

Page 192
Conclusion: R & Co. should include an “Other Matter”
paragraph in the audit report on this matter.
Q.122 While examining the going concern assumption of an entity, what
important indications should be evaluated and examined?
Or
What are the Financial indications to be considered by an auditor for
evolution of the going Concern assumption? [Nov. 08 (4 Marks)]
Or
Discuss the points and indications to be noted while examining and
evaluating the ‘Going Concern’ assumption for an entity.
[Nov. 17 (6 Marks)]
Or
Enumerate the Operating conditions of an entity that may cast
significant doubt on the entity’s ability to continue as a “Going
Concern”. [May 19 – Old Syllabus (4 Marks)]
Answer: Indications to be considered while evaluating Going Concern

Assumption:
SA 570 “Going Concern”, requires that auditor should obtain
sufficient appropriate audit evidence about the appropriateness
of management’s use of the going concern assumption in the
preparation and presentation of the financial statements.
Accordingly, when performing risk assessment procedures as
required by SA 315, the auditor shall consider whether there are
events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern. Examples of such
events or conditions are:

Page 193
Financial Indications
1. Net liability or net current liability position.
2. Fixed-term borrowings approaching maturity without
realistic prospects of renewal or repayment; or excessive
reliance on short-term borrowings to finance long-term
assets.
3. Indications of withdrawal of financial support by trade
payables.
4. Negative operating cash flows indicated by historical or
prospective financial statements.
5. Adverse key financial ratios.
6. Substantial operating losses or significant deterioration in the
value of assets used to generate cash flows.
7. Arrears or discontinuance of dividends.
8. Inability to pay trade payables on due dates.
9. Inability to comply with the terms of loan agreements.
10. Change from credit to cash-on-delivery transactions with
suppliers.
11. Inability to obtain financing for essential new product
development or other essential investments.
Operating Indications
1. Management intentions to liquidate the entity or to cease
operations.
2. Loss of key management without replacement.

Page 194
3. Loss of a major market, key customer(s), franchise, license, or

principal supplier(s).
4. Labour difficulties.
5. Shortages of important supplies.
6. Emergence of a highly successful competitor.
Other Indications
1. Non-compliance with capital or other statutory requirements.

2. Pending legal or regulatory proceedings against the entity
that may, if successful, result in claims that the entity is
unlikely to be able to satisfy.
3. Changes in law or regulation or government policy expected
to adversely affect the entity.
4. Uninsured or underinsured catastrophes when they occur.

Most of the examinees explained only the Financial indications properly and
fewexaminees could not highlight the operating and other indications while examining
and valuating the Going concern assumption as per SA 570. Few examinees could not give
the breakup of indicators and mixed up the indicators to produce the general answer.
Q.123 Yummy Ltd., dealing in manufacturing and trading of milk butter, has
a benchmark in its product for so many years. Tasty Ltd., a rival
company to Yummy Ltd., has introduced its new product, peanut
butter. Due to being health conscious, the consumers have shifted
from milk butter to peanut butter within few months. This has result
into massive loss during the year to Yummy Ltd. due to non-selling of
perishable milk products. The company has also started having
negative net worth.

Page 195
It's production head, finance head and marketing head have also left
the company. The company has no sound action plan to mitigate these
situations. Kindly guide the auditor of Yummy Ltd., how he should
deal with the situation.
Or
M/s T K Projects Limited, a manufacturing company in the Steel
industry was allegedly involved in some irregularity relating to
allotment of coal blocks for which a complaint was lodged against the
company by the government. The financial institution stopped
additional working capital finance which caused a financial crisis
resulting in stoppage of production. The company incurred a massive
loss during the year 2018-2019. There were delays in salary and
other payments. Certain key managerial personnel including GM
Finance and certain other employees left the company. The company
has no sound action plan to mitigate these situations. Guide the
statutory auditor on how he should deal with this situation.
[Nov. 15 (5 Marks)]
Answer: Evaluation of appropriateness of Going Concern assumption:
• SA 570 “Going Concern”, requires the auditor to obtain

sufficient appropriate audit evidence about the
appropriateness of management’s use of the going concern
assumption in the preparation and presentation of the
material uncertainty about the entity’s ability to continue as a
going concern.

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• The auditor shall evaluate management’s assessment of the
entity’s ability to continue as a going concern. In evaluating
management’s assessment, the auditor shall consider whether
management’s assessment includes all relevant information of
which the auditor is aware as a result of the audit.
• In the instant case, Yummy Ltd. (TK Projects Ltd.) has suffered
massive loss. Company has also started having negative net
worth and its key managerial personnel have also left the
company. The company has no action plan to mitigate these
situations. Thus, there are clear indications that there is
danger to entity’s ability to continue in future.
• Considering the fact that there is no sound plan of action from
the management to mitigate these factors and to recover the
company from such situations, the going concern assumption
does not seems to be appropriate.
Conclusion: Auditor should ask the management for appropriate
disclosure in the financial statement and include the same in his
report. However, if the management fails to make adequate
disclosure, the auditor should express a qualified or adverse
opinion.

Although majority of examinees have mentioned that the going concern assumption does
not seem appropriate yet some examinees failed to explain the disclosure aspects and the
expression of opinion by the auditor. Some examinees wrote about liquidity proceedings.
A few examinees explained consequences of fraud and reporting by auditor.

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Q.124 Mr. Ram, an auditor, identified some events that cast significant doubt
on the entity’s ability to continue as a going concern. What are the
additional procedures he should perform as per the related Standard
on Auditing? [Nov. 16 (5 Marks)]
Answer: Additional Procedures required to be performed in case of
doubt as to appropriateness of going concern:
As per SA 570 “Going Concern” when events or conditions have
been identified that may cast significant doubt on the entity’s
ability to continue as a going concern, the auditor shall obtain
sufficient appropriate audit evidence to determine whether or not
a material uncertainty exists through performing additional audit
procedures, including consideration of mitigating factors. These
procedures shall include:
(a) Where management has not yet performed an assessment of
the entity’s ability to continue as a going concern, requesting
management to make its assessment.
(b) Evaluating management’s plans for future actions, whether
the outcome of these plans is likely to improve the situation
and whether management’s plans are feasible in the
circumstances.
(c) Where the entity has prepared a cash flow forecast, evaluate
the reliability of the underlying data used to prepare the
forecast and determine whether there is adequate support for
the assumptions underlying the forecast.

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(d) Considering whether any additional facts or information have
become available since the date on which management made
its assessment.
(e) Requesting WR from management and, where appropriate,
TCWG, regarding their plans for future actions and the
feasibility of these plans.

Though most of the examinees mentioned SA 570 correctly but failed to state the
additional audit procedure.
Q.125 Toddle Limited had definite plan of its business being closed within a
short period from the close of the accounting year ended on 31st
March, 2019. The financial statements for the year ended
31/03/2019 had been prepared on the same basis as it had been in
earlier periods with an additional note that the business of the
company shall cease in near future and the assets shall be disposed
off in accordance with a plan of disposal as decided by the
management. The statutory auditors of the company indicated this
aspect in Key Audit matters only by a reference as to a possible
cessation of business and making of adjustments, if any, thereto to be
made at the time of cessation only. Comment on the reporting by the
statutory auditor as above. [May 18 – New Syllabus (5 Marks)]
Answer: Inappropriate use of Going Concern basis of accounting:

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material uncertainty about the entity’s ability to continue as a
going concern.
• If the financial statements have been prepared using the going
concern basis of accounting but, in the auditor’s judgment,
management’s use of the going concern basis of accounting in
the preparation of the financial statements is inappropriate,
the auditor shall express an adverse opinion.
• It is irrelevant whether or not the financial statements include
disclosure of the inappropriateness of management’s use of
the going concern basis of accounting.
• In the present case, company has definite plan of its business
being closed within a short period from the close of accounting
year. Financial Statements had been prepared on the same
basis as it had been in earlier periods i.e. going concern basis.
Additional note in the financial statements that business of the
company shall cease in near future and the assets shall be
disposed off in accordance with a plan of disposal as decided
by the management is given. Statutory auditor of the company
indicated this aspect in Key Audit Matters.

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Conclusion: Reporting made by the statutory auditor is not
correct as in this situation, based on the requirements of SA 570,
an adverse opinion need to be issued.
Q.126 M/s Airlift Ltd., Carrying on the business of Passenger Transportation
by air is running into continuous financial losses as well as reduction
in Sales due to stiff competition and frequent break down of its own
aircrafts. The Financial Statements for the year ended on 31.03.2019
are to be now finalized. The Management is quite uncertain as to its
ability to continue in near future and has informed the Auditors that
having seized of this matter, it had constituted a committee to study
this aspect and to give suggestions for recovery, if any, from this bad
situation. Till the study is completed, according to the Management,
the issue involves uncertainty as to its ability to continue its business
and it informs the Auditor that the fact of uncertainty clamping on the
“Going Concern” would suitably be disclosed in notes to accounts.
State the reporting requirement if any, in the Independent Auditor’s
Report in respect of this matter. [Nov. 18 – New Syllabus (5 Marks)]
Answer: Reporting Requirements in the Independent Auditor’s report

in respect of Going Concern:
financial statements and to conclude whether there is a material
uncertainty about the entity’s ability to continue as a going concern.

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• When events or conditions have been identified that may cast
concern, the auditor shall obtain sufficient appropriate audit
evidence to determine whether or not a material uncertainty
exists through performing additional audit procedures,
including consideration of mitigating factors.
• When the auditor concludes that the use of the going concern
assumption is appropriate in the circumstances but a material
uncertainty exists, the auditor shall determine whether the
financial statements:
(a) Adequately describe the principal events that may cast
significant doubt on the entity’s ability to continue as a
going concern and management’s plans to deal with these
events or conditions; and
(b) Disclose clearly that there is a material uncertainty related
to going concern and, therefore, that it may be unable to
realize its assets and discharge its liabilities in the normal
course of business.
• If adequate disclosure is made in the financial statements, the
auditor shall express an unmodified opinion and the auditor’s
report shall include a separate section under the heading
“Material Uncertainty Related to Going Concern” to:
(i) Draw attention to the note in the financial statements that
discloses the matters set out above; and

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(ii) State that these events or conditions indicate that a
material uncertainty exists that may cast significant doubt
on the entity’s ability to continue as a going concern and
that the auditor’s opinion is not modified in respect of the
matter.
• In the instant case, the auditor should disclose about the
material uncertainty and express an unmodified opinion and
in his audit report shall include a separate section under the
heading “Material Uncertainty Related to Going Concern” to
draw attention to the note in the financial statements that
discloses the matters set out above; and state that these
events or conditions indicate that a material uncertainty
exists that may cast significant doubt on the entity’s ability to
continue as a going concern and that the auditor’s opinion is
not modified in respect of the matter.
Q.127 AQP Limited is one of the prominent players in the chemicals
industry. The company is a public company domiciled in India and
listed on BSE and NSE. The Company was facing extreme liquidity
constraints and there were multiple indicators that casted doubt over
the company’s ability to continue as a going concern.
The Company was led into insolvency proceedings by consortium of
banks led by PNB and the NCLT ordered the commencement of
corporate insolvency process against the Company on 31 August
2018. The company invited prospective lenders, investors and others

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to submit their resolution plans to the Resolution Professional (RP)
latest by 1 January 2019. The RP reviewed the resolution plans and
ensured conformity with Insolvency and Bankruptcy Code 2016. The
compliant plans were presented to Committee on Creditors (CoC) on
2 February 2018 and the resolution plan submitted by PQR Ltd. was
evaluated as highest evaluated Compliant Resolution Plan. CoC of AQP
Ltd approved the Resolution Plan submitted by PQR Ltd. on 2 March
2019. The approval of NCLT was finally obtained on 4 May 2019.
PQR Ltd submitted detailed plans and commitments as part of the
resolution plan including clearance of all outstanding debts which
were leading to negative cash flows.
Please suggest how would you deal with this situation as the auditors
of AQP Ltd. [MTP-March 19, RTP-Nov. 19]
Answer: Evaluation of Appropriateness of Going Concern Basis of
Accounting:
• As per SA 570 Going Concern, if events or conditions have been
identified that may cast significant doubt on the entity’s ability
to continue as a going concern, the auditor shall obtain
sufficient appropriate audit evidence to determine whether or
not a material uncertainty exists related to events or
conditions that may cast significant doubt on the entity’s
ability to continue as a going concern (hereinafter referred to
as “material uncertainty”) through performing additional audit
procedures, including consideration of mitigating factors.

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• Additional procedures shall include:

(i) Where management has not yet performed an
assessment of the entity’s ability to continue as a going
concern, requesting management to make its assessment.
(ii) Evaluating management’s plans for future actions in
relation to its going concern assessment, whether the
outcome of these plans is likely to improve the situation
and whether management’s plans are feasible in the
circumstances.
(iii) Where the entity has prepared a cash flow forecast
evaluate the reliability of the underlying data generated
to prepare the forecast and determine whether there is
adequate support for the assumptions underlying the
forecast.
(iv) Considering whether any additional facts or information
have become available since the date on which
management made its assessment.
(v) Requesting written representations from management
and, where appropriate, those charged with governance,
regarding their plans for future actions and the feasibility
of these plans.
• The auditor shall evaluate whether sufficient appropriate audit
evidence has been obtained regarding, and shall conclude on,
the appropriateness of management’s use of the going concern
basis of accounting in the preparation of the financial
statements.

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• If events or conditions have been identified that may cast
concern but, based on the audit evidence obtained the auditor
concludes that no material uncertainty exists, the auditor shall
evaluate whether, in view of the requirements of the applicable
financial reporting framework, the financial statements
provide adequate disclosures about these events or conditions.
• In the instant case, the approval of the resolution plan is a
significant mitigating factor to counter the going concern
issues of AQP Ltd. PQR Ltd has submitted a detailed plan and
commitments that has been given as part of the resolution plan
which includes clearance of all outstanding debts which were
leading to negative cash flows.
Conclusion: Events and conditions are mitigated effectively and
there is no material uncertainty in relation to the ability of the
company to continue as a going concern.
1.27 - SA 580 “Written Representations”
Q.128 Explain what is meant by “Written Representations” and indicate to
what extent an auditor can place reliance on such representations.
Answer: Meaning of Written Representation:
• As per SA 580 “Written Representations” it is a written
statement by management provided to the auditor to confirm
certain matters or to support other audit evidence. Written

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representations in this context do not include financial
statements, the assertions therein, or supporting books and
records.
• Written representations are necessary information that the
auditor requires in connection with the audit, hence they are
recognized as audit evidence as a response to inquiries.
• Although written representations provide necessary audit
evidence, they do not provide sufficient appropriate audit
evidence on their own about any of the matters with which
they deal.
• The written representations shall be in the form of a
representation letter addressed to the auditor.
Extent of Reliance:
• If the auditor has concerns about the competence, integrity,
ethical values or diligence of management, the auditor shall
determine their effect on the reliability of representations
(oral or written) and audit evidence in general.
• In particular, if written representations are inconsistent with
other audit evidence, the auditor shall perform audit
procedures to attempt to resolve the matter.
• If the auditor concludes that the written representations are
not reliable, the auditor shall take appropriate actions,
including determining the possible effect on the opinion.

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• If he claims that there is sufficient doubt about integrity of
management, he shall issue a disclaimer of opinion.
Q.129 State briefly the basic elements of Management Representation
Letter. [Nov. 11 (2 Marks)]
Answer: Basic Elements of a Management Representation Letter:
As per SA 580 “Written Representations”, some of the basic
elements of a Management Representation letter are-
(1) It is a written statement by management provided to the
auditor to confirm certain matters or to support other audit
evidence.
(2) It does not include financial statements, the assertions
therein, or supporting books and records.
(3) The auditor shall request management to provide a written
representation that it has fulfilled its responsibility for the
preparation of the financial statements in accordance with
the applicable financial reporting framework, including
where relevant their fair presentation, as set out in the terms
of the audit engagement.
(4) The written representations shall be for all financial
statements and period(s) referred to in the auditor’s report.
(5) The written representations shall be in the form of a
representation letter addressed

“ICAI Examiner to the auditor.
Comments”
The candidate mentioned the contents of Management Representation Letter instead of
basic elements of it.

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Q.130 In the course of audit of ABC Ltd. its management refuses to provide
written representations. As an auditor what is your duty?
[May 10 (4 Marks)]
Answer: Duty of an Auditor if management refuses to provide written
representations:
As per SA 580 “Written Representations”, if the management
does not provide one or more of the requested written
representations, the auditor shall:
(i) Discuss the matter with management,
(ii) Re-evaluate the Integrity of the management and evaluate
the effect that this may have on the reliability of
representations (oral or written) and audit evidence in
general, and
(iii) Take appropriate actions, including determining the possible
effect on the opinion in the auditor’s report.
(iv) Disclaim an opinion on the financial statements in
accordance with SA 705 “Modifications to the Opinion in the
Independent Auditor’s Report”.
Q.131 An auditor of Mohan Ltd. was not able to get the confirmation about
the existence and value of certain machineries. However, the
management gave him a certificate to prove the existence and value
of the machinery as appearing in the books of account. The auditor
accepted the same without any further procedure and signed the
audit report. Is he right in his approach?

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Or
The Auditor of PQR Pvt. Ltd. having turnover of Rs. 12 crores, was not
able to get the confirmation about the existence and value of certain
stock. However, a certificate from the management has been
obtained regarding the existence and value of the stock at the year
end. The auditor relied on the same and without any further
procedure, signed the Audit Report. Is he right in his approach?
[Nov. 14 (5 Marks)]
Or
While auditing a lawyer company, Mr. X, the statutory auditor of the
company, was unable to get the confirmation about the existence and
value of certain books existed in the library worth Rs. 35 lakhs.
However, the management gave him a certificate to prove the
existence and value of the books as appearing in the books of
account. The auditor accepted the same without any further
procedure and signed the audit report. Is he right in his approach?
Answer: Validity of Management Representation:
• The physical verification of fixed assets (Inventory) is the
primary responsibility of the management. The auditor,
however, is required to examine the verification program
adopted by the management. He must satisfy himself about
the existence, ownership and valuation of fixed assets
(inventory).

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• In the case of Mohan Ltd., the auditor has not been able to
verify the existence and value of some machinery (inventory)
despite the verification procedure followed in routine audit. He
accepted the certificate given to him by the management
without making any further enquiry.
• As per SA 580 “Written Representation” the representations
received from management are recognised as audit evidence,
but they do not constitute Sufficient and appropriateness.
• Auditor is required to seek corroborative audit evidence from
other sources inside or outside the entity, to evaluate whether
such representations are reasonable and consistent with other
evidences. Representation received from Management cannot
be a substitute for other audit evidence that the auditor could
reasonably expect to be available.
• If the auditor is unable to obtain sufficient appropriate audit
evidence that he believes would be available regarding a
matter, which has or may have a material effect on the
financial information, this will constitute a limitation on the
scope of his examination even if he has obtained a
representation from management on the matter.
Conclusion: The approach adopted by the auditor is not right.

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Q.132 PRSH & Co is the statutory auditor of Make My Journey Ltd. The
company is in the business of tours and travels. Annual turnover of
the company is INR 2000 crores and profits are INR 190 crores.
During the planning meeting of the management and the auditors, it
was discussed that the management needs to provide written
representation letter to the auditors for the preparation of the
financial statements and for the completeness of the information
provided to the auditor. At the time of closure of the audit, there has
been some confusion about the requirements of the written
representation letter. Management argued that representation need
not be written, it can also be verbal which has been provided to the
audit team during the course of their audit. Auditors have completed
their documentation and hence in a way, representation based on
verbal discussions with the auditors has also got documented.
Auditors explained that this is mandatory to obtain written
representation in accordance with the requirements of SA 580.
However, still some confusion remains regarding the date and period
covered by the written representation. You are required to advise
about the date of and period covered by written representation in
view of SA 580. [RTP-May 19]
Answer: Date of and period covered by written representation:

SA 580 “Written Representations” provides the following:
• The date of the written representations shall be as near as
practicable to the date of the auditor’s report. However, it

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should not be after the date of auditor’s report. The written

representations shall be for all financial statements and
period(s) referred to in the auditor’s report.
• In some circumstances it may be appropriate for the auditor to
obtain a written representation about a specific assertion in
the financial statements during the course of the audit. Where
this is the case, it may be necessary to request an updated
written representation.
• The written representations are for all periods referred to in
the auditor’s report because management needs to reaffirm
that the written representations it previously made with
respect to the prior periods remain appropriate. The auditor
and management may agree to a form of written
representation that updates written representations relating
to the prior periods by addressing whether there are any
changes to such written representations and, if so, what they
are.
• Situations may arise where current management were not

present during all periods referred to in the auditor’s report.
Such persons may assert that they are not in a position to
provide some or all of the written representations because
they were not in place during the period. This fact, however,
does not diminish such persons’ responsibilities for the
financial statements as a whole. Accordingly, the requirement
for the auditor to request from them written representations
that cover the whole of the relevant period(s) still applies.

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Q.133 In the course of audit of K Ltd., its auditor Mr. 'N' observed that there
was a special audit conducted at the instance of the management on a
possible suspicion of a fraud and requested for a copy of the report to
enable him to report on the fraud aspects. Despite many reminders it
was not provided. In absence of the special audit report, Mr. 'N'
insisted that he be provided with at least a written representation in
respect of fraud on/by the company. For this request also, the
management remained silent. Please guide Mr. 'N'.
[May 14 (5 Marks), RTP-May 18, MTP-Oct.18]
Answer: Auditors Responsibilities Relating to Fraud:
• As per SA 240, “The Auditor’s Responsibilities relating to

Fraud in an Audit of Financial Statements”, the primary
responsibility for the prevention and detection of fraud rests
with both TCWG of the entity and management. In addition, an
auditor conducting an audit in accordance with SAs is
responsible for obtaining reasonable assurance that the
financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error.
• As per SA 580, “Written Representations”, if management does
not provide the requested written representations, the auditor
shall discuss the matter with management; re-evaluate the
integrity of management and evaluate the effect that this may
have on the reliability of representations (oral or written) and
audit evidence in general; and take appropriate actions,
including determining the possible effect on the opinion in the
auditor’s report.

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• The auditor shall disclaim an opinion on the financial
statements if the auditor concludes that there is sufficient
doubt about the integrity of management such that the written
representations are not reliable; or management does not
provide the written representations.
• In the instant case, in the course of audit of K Ltd., its auditor
Mr. N observed that there was a special audit conducted at the
instance of the management on a possible suspicion of fraud.
Therefore, the auditor requested for special audit report,
which was not provided by the management despite of many
reminders. Mr. N also insisted for written representation in
respect of fraud on/by the company. For this request also,
management remained silent.
Rs. 1 Cr. or more.

Page 215
company by its officers oremployees has been noticed or
reported during the year; If yes, the nature and theamount
Conclusion: Auditor is required to state the facts in his report
and he should also disclaim an opinion on the financial
statements. In exceptional circumstances, he may also consider
whether it is appropriate to withdraw from engagement.
Q.136 Comment on the following: Statutory auditor of O Ltd requested the
management for a written representation in respect of obsolescence
of inventory and warranty obligations recognized by the company in
its financial statements. The management denied the representation
on the ground that during the course of audit, all the required
procedures were performed by the auditor and after obtaining
sufficient appropriate audit evidence, auditor has issued a clean
report. Please comment. [MTP-March 19]

governance whether they believe significant assumptions used
in making accounting estimates are reasonable.

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• Depending on the nature, materiality and extent of estimation

uncertainty, written representations about accounting
estimates recognised or disclosed in the financial statements
may include representations:
(d) That no subsequent event requires adjustment to the
accounting estimates and disclosures included in the
• For those accounting estimates not recognised or disclosed in
the financial statements, written representations may also
include representations about:
(a) The appropriateness of the basis used by management for

determining that the recognition or disclosure criteria of
the applicable financial reporting framework have not
been met.

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(b) The appropriateness of the basis used by management to
overcome the presumption relating to the use of fair value
set forth under the entity’s applicable financial reporting
framework, for those accounting estimates not measured
or disclosed at fair value.
Conclusion: Management’s contention on the ground that during
the course of audit, all the required procedures were performed
by the auditor and after obtaining sufficient appropriate audit
evidence, auditor has issued a clean report, for not providing
written representation is not correct. The management should
provide written representations to the auditor.
Duty of the auditor if management refuses to provide
written representations: Refer answer of Q. No. 132.
Q.137 Mr. L while conducting the audit of ABC Ltd., observed that a
substantial amount is recognized in respect of obsolescence of
inventory and warranty obligation in the financial statements. Mr. L
wants to obtain written representation from the management to
determine whether the assumptions and estimates used are
reasonable.
Guide Mr. L with reference to the relevant Standard on Auditing.

Page 218

governance whether they believe significant assumptions used
in making accounting estimates are reasonable.
• SA 580 “Written Representations” discusses the use of written
representations. Depending on the nature, materiality and
extent of estimation uncertainty, written representations
about accounting estimates recognised or disclosed in the
financial statements may include representations:
That no subsequent event requires adjustment to the

accounting estimates and disclosures included in the financial
statements.

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1.28 - SA 600 “Using the Work of Another Auditor”

Q.135 “There should be sufficient liaison between a principal auditor and
other auditors”. Discuss the above statement and state in this context
the reporting considerations, when the auditor uses the work
performed by other auditor.

Answer: Coordination between Principal Auditor and Other Auditor:
SA 600 “Using the work of Another Auditor” applies in situation
where an auditor (principal auditor), reporting on the financial
information of an entity, uses the work of another auditor (other
auditor) with respect to the financial information of one or more
components included in the financial information of the entity.
To ensure coordination among both of them, SA 600 provides
the followings:
1. There should be sufficient liaison between the principal
auditor and the other auditor.
2. For this purpose, the principal auditor may find it necessary
to issue written communication(s) to the other auditor.
3. The other auditor, knowing the context in which his work is
to be used by the principal auditor, should co-ordinate with
the principal auditor.
• Adhering to time-table.
• Bringing to the attention of PA any significant finding.
• Compliance with relevant statutory requirements.
• Respond to detailed questionnaire.

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Reporting Considerations:
1. When the principal auditor concludes, based on his
procedures, that the work of the other auditor cannot be used
and
2. the principal auditor has not been able to perform sufficient
additional procedures regarding the financial information of
the component audited by the other auditor,
the principal auditor should express a qualified opinion or
disclaimer of opinion because there is a limitation on the scope
of audit.
Q.136 Describe the relevance of SA 600 while auditing consolidation of
Financial Statements. [Nov. 15 (4 Marks)]
Answer: Audit Procedure when principal auditor is using the work of
another auditor:
SA 600 “Using the work of Another Auditor” guides principal
auditor regarding the procedures to be performed when he is
using the work of another auditor. In case of audit of
Consolidated financial statements, principal auditor will use the
work of auditor of subsidiary company, associates and joint
venture. As per SA 600, auditor of Consolidated Financial
Statements is supposed to perform the following:
(a) When principal auditor plans to use the work of another
auditor, he should consider the professional competence of
the other auditor in the context of specific assignment if the

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other auditor is not a member of the ICAI.
(b) The principal auditor should perform procedures to obtain
sufficient appropriate audit evidence, that the work of the
other auditor is adequate for the principal auditor's purposes,
in the context of the specific assignment.
(c) The principal auditor should consider the significant findings
of the other auditor.
(d) The principal auditor should document in his audit working
papers the followings
• Components audited by another;
• Audit procedures adopted and results thereof;
• Conclusion that particular component is not material;
• Manner of dealing with modification in another auditor’s
report
(e) When the principal auditor concludes, based on his
procedures, that the work of the other auditor cannot be used
and the principal auditor has not been able to perform
sufficient additional procedures regarding the financial
information of the component audited by the other auditor,
the principal auditor should express a qualified opinion or
disclaimer of opinion because there is a limitation on the
scope of audit.
(f) When the principal auditor has to base his opinion on the
financial information of the entity as a whole relying upon the

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statements and reports of the other auditors, his report
should state clearly the division of responsibility for the
financial information of the entity by indicating the extent to
which the financial information of components audited by the
other auditors have been included in the financial
information of the entity.

Examinees failed to explain the various aspects the principal auditor would consider
while complying with the requirements of SA 600, 'Using the Work of another Auditor'.
Many examinees described only consolidation of financial statements rather than using
the work of another auditor.
Q.137 B Ltd. is the Subsidiary company of A Ltd. ABC & Associates has been
appointed as auditor of A Ltd. for the Financial year 2019-20 and XYZ
& Associates has been appointed as auditor of B Ltd for the year
2019-20. Explain the role of ABC & Associates and XYZ & Associates
as auditors of the parent company and subsidiary respectively.
[Nov. 16 (4 Marks)]
Answer: Role of Auditor of Parent Company and Subsidiary Company:
SA 600 “Using the work of Another Auditor” establishes the
standard when an auditor, reporting on the financial statements
of a group (consolidated financial statements), uses the work of
another auditor on the financial information of one or more
components included in the financial statements of the entity.
Accordingly, role of auditor of parent company and subsidiary
are as follows:
Role of Auditor of Parent Company:

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(a) Consider the professional competence of Other Auditor, if
Other Auditor is not a member of ICAI.
(b) Visit component and examine books of account, if essential.
(c) Obtain sufficient appropriate evidence, that work of Other
Auditor is adequate for Principal Auditor's purposes.
(d) Discuss audit procedures applied by Other Auditor.
(e) Review a written summary of Other Auditor’s procedures
and findings through questionnaires/checklist.
(f) Consider significant findings of Other Auditor and discuss
audit findings with Other Auditor.
(g) Perform supplemental tests if necessary.
Role of Auditor of Subsidiary Company:
The auditor of subsidiary company, knowing the context in
which his work is to be used by the principal auditor, should co-
ordinate with the principal auditor w.r.t. following:
(a) Adhering to time-table.
(b) Bringing to the attention of PA any significant finding.
(c) Compliance with relevant statutory requirements.
(d) Respond to detailed questionnaire.

Examinees are not aware of the role of auditor of parent company and subsidiary
company.

Page 224
1.29 - SA 610 “Using the Work of Internal Auditor”

Q.138 State the important aspects to be considered by the External auditor
in the evaluation of Internal Audit Function. [Nov. 08 (4 Marks)]
Or
You are appointed statutory auditor of X Ltd. X Ltd. has an internal
audit system and reports for the same are given to you. Mention the
factors you will consider to ensure that the said system of internal
audit of X Ltd. is commensurate with the size of the company and
nature of its business. [May 09 (8 Marks)]
Or
CA Mr. X, a practicing chartered accountant has been appointed as an
internal auditor of Textile Ltd. He conducted the physical verification
of the inventory at the year-end and handed over the report of such
verification to CA Mr. Y, the statutory auditor of the Company, for his
view and reporting. Can CA Mr. Y rely on such report? [MTP-Oct.18]
Or
In the course of the statutory audit of Z Ltd, its statutory auditors,
having determined that the work of internal auditor is likely to be
adequate for the purpose of statutory audit, wanted to use the work
of internal auditor in respect of physical verification of fixed assets.
How an evaluation of this specific work done by the internal auditor
can be done? [May 12, Nov. 15 (5 Marks)]

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Or
Rajpanth Ltd. appointed you as its statutory auditor for the current
financial year. During the course of auditing, you meticulously
analysed that the work performed by company’s internal auditor is
likely to be adequate for the purpose of statutory audit.
Consequently, you decided to use the work of internal auditor in
respect of physical verification of tangible assets specifically.
State how you would evaluate the specific work performed by
internal auditor to determine its adequacy and who would be
responsible for expression of opinion on financial statements.

Answer: Evaluation of Internal Audit function so as to reply on work
of Internal Auditor:
SA 610 “Using the work of Internal auditors” deals with the
external auditor’s responsibilities regarding the work of internal
auditors when the external auditor has determined, in
accordance with SA 315 that the internal audit function is likely
to be relevant to the audit.
For this purpose, external auditor is required to evaluate the
following:
A. Objectivity of Internal Auditor: Objectivity refers to the
ability to perform without allowing bias to override
professional judgments. Factors that may affect the external
auditor’s evaluation include the following:
1. Organizational status of the internal audit function;

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2. Conflicting responsibilities.
3. Oversight functions of TCWG w.r.t. employment decisions
related to the internal audit function.
4. Constraints or restrictions placed on the internal audit
function by management or TCWG.
B. Level of Competency: Competence of the internal audit
function refers to the attainment of knowledge and skills to
enable assigned tasks to be performed diligently. Factors that
may affect the external auditor’s determination include the
following:
1. Policies for hiring, training and assigning internal auditors
to internal audit engagements.
2. Adequate of technical training and proficiency in auditing
of internal auditors.
3. Knowledge of internal auditors w.r.t. entity’s financial
reporting and the applicable FRF.
4. Membership of relevant professional bodies that oblige
internal auditors to comply with the relevant professional
standards.
C. Systematic and Disciplined Approach: Factors that may
affect the external auditor’s determination of whether the
internal audit function applies a systematic and disciplined
approach include the following:

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1. Existence, adequacy and use of documented internal audit
procedures.
2. Existence of appropriate quality control policies and
procedures for internal audit function.
Conclusion: In the present case, if the statutory auditor is
satisfied about the appropriateness of the verification, he can
rely on the report but if he finds that the verification is not in
order, he has to decide otherwise. The ultimate responsibility to
express opinion on the financial statement is that of the
statutory auditor.

Most of theexaminees discussed how to verify fixed assets instead of explaining about
evaluation becarried out of specific work done by the internal auditor. Some examinees
wrote about theimportance of internal audit which was not required.
Q.139 Mr. A was appointed as statutory auditor of X Ltd. X Ltd. has an

internal audit system and Mr. A is of the opinion that internal
auditors can be used to provide direct assistance for the purpose of
statutory audit. Advise Mr. A whether he can take direct assistance of
internal auditor and if yes, what are the precautions he need to take.
Or
Moon Ltd. of which you are the statutory auditor, have an internal
audit being conducted by an outside agency. State the factors that
weigh considerations in opting to make use of direct assistance of the
internal auditors for the purpose of statutory audit.
[May 18 – New Course (4 Marks)]

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Answer: Using direct assistance of internal auditor:
As per SA 610 “Using the Work of Internal Auditor” statutory
auditor can take direct assistance of internal auditor subject to
following conditions:
1. The external auditor is not prohibited by law or regulation
from obtaining direct assistance from internal auditors.
2. There are no significant threats to the objectivity of the
internal auditor.
3. The internal auditor is sufficient competent to perform the
proposed work.
Precautions to be taken while using direct assistance:
1. The external auditor shall not use internal auditors to
provide direct assistance to perform procedures that:
(a) Involve making significant judgments in the audit;
(b) Relate to higher assessed risks of material misstatement;
(c) Relate to work with which the internal auditors have
been involved; or
(d) Relate to decisions the external auditor makes in
accordance with this SA regarding the internal audit
function and the use of its work or direct assistance.
2. Prior to using internal auditors to provide direct assistance
for purposes of the audit, the external auditor shall:

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(a) Obtain written agreement from an authorized
representative of the entity that the internal auditors will
be allowed to follow the external auditor’s instructions,
and that the entity will not intervene in the work the
internal auditor performs for the external auditor; and
(b) Obtain written agreement from the internal auditors that
they will keep confidential specific matters as instructed
by the external auditor and inform the external auditor of
any threat to their objectivity.
3. The external auditor shall direct, supervise and review the
work performed by internal auditors on the engagement in
Q.140 Mr. A is appointed as statutory auditor of XYZ Ltd. XYZ Ltd is required
to appoint internal auditor as per statutory provisions given in the
Companies Act, 2013 and appointed Mr. B as its internal auditor. The
external auditor Mr. A asked internal auditor to provide direct
assistance to him regarding evaluating significant accounting
estimates by the management and assessing the risk of material
misstatements.
(a) Discuss whether Mr. A, statutory auditor, can ask direct
assistance from Mr. B, internal auditor as stated above in view of
auditing standards.
(b) Will your answer be different, if Mr. A ask direct assistance from
Mr. B, internal auditor with respect to external confirmation
requests and evaluation of the results of external confirmation
procedures? [RTP-May 20]

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Answer: (a) Direct Assistance from Internal Auditor:
As per SA 610 “Using the Work of Internal Auditor”, the
external auditor shall not use internal auditors to provide
direct assistance to perform procedures that involve making
significant judgments in the audit. The external auditor shall
not use internal auditors to provide direct assistance to
perform procedures that:
Significant judgments include the following:
• Assessing the risks of material misstatement;
• Evaluating the sufficiency of tests performed;
• Evaluating the appropriateness of management’s use
of the going concern assumption;
• Evaluating significant accounting estimates; and
• Evaluating the adequacy of disclosures in the financial
statements, and other matters affecting the auditor’s
report
(c) Relate to work with which the internal auditors have
been involved; or
(d) Relate to decisions the external auditor makes in
accordance with this SA regarding the internal audit
function and the use of its work or direct assistance.

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In the present case, Mr. A asked internal auditor to provide
direct assistance regarding evaluating significant accounting
estimates and assessing the risk of material misstatements.
Conclusion: Evaluation of Accounting estimates and
assessing Risk of Material Misstatements involve significant
judgements, hence Mr. A should not insists for direct
assistance in these areas.
(b) Direct Assistance from Internal Auditor in case of
External Confirmation Procedures:
• SA 610 “Using the Work of Internal Auditor”, provide
relevant guidance in determining the nature and extent of
work that may be assigned to internal auditors.
• In determining the nature of work that may be assigned to
internal auditors, the external auditor is careful to limit
such work to those areas that would be appropriate to be
assigned.
• In accordance with SA 505, “External Confirmation” the
external auditor is required to maintain control over
external confirmation requests and evaluate the results of
external confirmation procedures, it would not be
appropriate to assign these responsibilities to internal
auditors.

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Conclusion: It would not be appropriate to use direct
assistance w.r.t. obtaining external confirmation requests
and their evaluation. Assistance may be used in assembling
information necessary for the external auditor to resolve
exceptions in confirmation responses.
Q.141 OPQ Ltd. is in the business of software consultancy. The company has
had large balances of accounts receivables in the past years which
have been assessed as area of high risk. For the year ended 31 March
2020, in respect of the valuation of accounts receivable, the statutory
auditor has assigned the checking of the accuracy of the aging of the
accounts receivables and provision based on ageing to the internal
auditor providing direct assistance to him. Please advise.
[MTP-April 19, RTP-May 19, MTP-Oct. 19]

Answer: Direct Assistance from Internal Auditor:
As per SA 610 “Using the Work of Internal Auditor”, the external
auditor shall not use internal auditors to provide direct
assistance to perform procedures that involve making
significant judgments in the audit. The external auditor shall not
use internal auditors to provide direct assistance to perform
procedures that:
(c) Relate to work with which the internal auditors have been
involved; or

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(d) Relate to decisions the external auditor makes in accordance
with this SA regarding the internal audit function and the use
of its work or direct assistance.
In the present case, Statutory auditor assigned internal auditor
to provide direct assistance regarding checking of the accuracy
of the aging of the accounts receivables and provision based on
ageing. Valuation of accounts receivable is assessed as an area of
higher risk.
Conclusion: Statutory auditor could assign the checking of the
accuracy of the aging to an internal auditor providing direct
assistance. However, because the evaluation of the adequacy of
the provision based on the aging would involve more than
limited judgment, it would not be appropriate to assign that
latter procedure to an internal auditor providing direct
assistance.
1.30 - SA 620 “Using the Work of Auditor’s Expert”
Q.142 What are the factors that may influence the auditor’s decision on
whether to use an auditor’s expert, when management has used a
management’s expert in preparing the financial statements?
Answer: Factors influencing the auditor’s decision w.r.t. use of
auditor’s expert when management had used a
management expert:

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SA 620 “Using the work of an Auditor’s Expert” deals with the
auditor’s responsibilities regarding the use of an individual or
organisation’s work in a field of expertise other than accounting
or auditing, when that work is used to assist the auditor in
obtaining sufficient appropriate audit evidence. Accordingly,
factors influencing the auditor’s decision w.r.t. use of auditor’s
expert when management had used a management expert are:
1. The nature, scope and objectives of the management’s
expert’s work.
2. Whether the management’s expert is employed by the entity,
or is a party engaged by it to provide relevant services.
3. The extent to which management can exercise control or
influence over the work of the management’s expert.
4. The management’s expert’s competence and capabilities.
5. Whether the management’s expert is subject to technical
performance standards or other professional or industry
requirements.
6. Any controls within the entity over the management’s
expert’s work.
Q.143 While doing audit, Ram, the Auditor requires reports from experts
for the purpose of audit evidence. What types of reports/opinions he
can obtain and to what extent he can rely upon the same?
[Nov. 10 (4 Marks)]

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Answer: Types of Reports / Opinion:
As per SA 620, “Using the work of an Auditor’s Expert”, the
auditor can obtain the following types of reports, or opinions or
statements of an expert for the purpose of audit evidence:
1. The valuation of complex financial instruments, land and
buildings, plant and machinery, jewellery, works of art,
antiques, intangible assets, assets acquired and liabilities
assumed in business combinations and assets that may have
been impaired.
2. The actuarial calculation of liabilities associated with
insurance contracts or employee benefit plans.
3. The estimation of oil and gas reserves.
4. The valuation of environmental liabilities, and site clean-up
costs.
5. The interpretation of contracts, laws and regulations.
6. The analysis of complex or unusual tax compliance issues.
Extent to which Expert work can be relied upon:
When the auditor intends to use the work of an expert, he shall
evaluate the adequacy of the auditor’s expert’s work, w.r.t. the
following:
1. Findings and Conclusions: To ensure the evaluate the
relevance and reasonableness of that expert’s findings or
conclusions, and their consistency with other audit evidence;

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2. Significant Assumptions and Methods: If the expert’s work
involves use of significant assumptions and methods, the
relevance and reasonableness of those assumptions and
methods should be evaluated.
3. Source Data used: Auditor is required to evaluate the
relevance, completeness, and accuracy of that source data.
If the auditor determines that the work of the auditor’s expert is
not adequate for the auditor’s purposes, he shall agree with that
expert on the nature and extent of further work to be performed
by that expert; or perform further audit procedures appropriate
to the circumstances.
Q.144 X Ltd had a net worth of INR 1300 crores because of which Ind AS
became applicable to them. The company had various derivative
contracts – options, forward contracts, interest rate swaps etc. which
were required to be fair valued for which company got the fair
valuation done through an external third party. The statutory
auditors of the company involved an auditor’s expert to audit
valuation of derivatives. Auditor and auditor’s expert were new to
each other i.e. they were working for the first time together but
developed a good bonding during the course of the audit. The auditor
did not enter into any formal agreement with the auditor’s expert.
Please advise. [MTP-Oct. 18, MTP-March 19, RTP-May 19]

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Answer: Agreement with Auditor’s Expert:
• As per SA 620 “Using work of Auditor’s Expert” the auditor

shall agree, in writing when appropriate, on the following
matters with the auditor’s expert:
1. Nature, scope & objectives of Auditor’s Expert work (may
include relevant technical standards or other professional
and industry requirements).
2. Respective roles & responsibilities of auditors & Auditor
Expert.
3. Nature, timing & extent of communication, including form
of report.
4. Need for Auditor Expert to observe confidentiality
requirements under ethical requirements or Law and
regulation.
• In the instant case X Ltd. had various derivative contracts –
options, forward contracts, interest rate swaps etc. which
were required to be fair valued for which company got the fair
valuation done through an external third party. The statutory
auditors of the company involved an auditor’s expert to audit
valuation of derivatives.
Conclusion: Considering the complexity involved in the

valuation and volume of derivatives and also due to the fact that
the auditor and auditor’s expert were new to each other, auditor
should have signed a formal agreement/ engagement letter with
the auditor’s expert in respect of the work assigned to him in

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Q.145 Mr. Mohan, an auditor of KTEN Limited wants to use the work of an
expert. With reference to the Standard on Auditing state the factors
which suggest the need for details and written agreement between
the auditor and the auditor’s expert. [Nov. 16 (5 Marks)]
Answer: Factors suggesting detailed and written agreement between
the auditor and the auditor’s expert:
As per SA 620 “Using work of Auditor’s Expert” the auditor shall
agree, in writing when appropriate, on the following matters
with the auditor’s expert:
1. Nature, scope & objectives of Auditor’s Expert work (may
include relevant technical standards or other professional
and industry requirements).
2. Respective roles & responsibilities of auditors & Auditor
Expert.
3. Nature, timing & extent of communication, including form of
report.
4. Need for Auditor Expert to observe confidentiality
requirements under ethical requirements or Law and
regulation.
Factors suggesting detailed and written agreement between
the auditor and the auditor’s expert may be listed as follow:
1. The auditor’s expert will have access to sensitive or
confidential entity information.

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2. The respective roles or responsibilities of the auditor and the
auditor’s expert are different from those normally expected.
3. Multi-jurisdictional legal or regulatory requirements apply.
4. The matter to which the auditor’s expert’s work relates is
highly complex.
5. The auditor has not previously used work performed by that
expert.
6. The greater the extent of the auditor’s expert’s work, and its
significance in the context of the audit.

Majority of the examinees failed to state the factors necessitating the need for detailed
agreement. Resulting in below average performance.
Q.146 State what may be the evaluative or review procedures that the
Statutory Auditor may do before concluding as to relevance and
reasonableness of Auditor’s Expert work for using it for his audit
purposes. [Nov. 18-New Syllabus (5 Marks)]
Or
CA Dabu has been appointed as an auditor of M/s MAP Technocraft
Ltd. to conduct statutory audit. While conducting audit, he came
across some difficulties which the management could not explain to
him properly and, therefore, he decided to take services of Mr. Jay, an
engineering consultant. Mr. Jay performed his work and submitted
details to CA Dabu. State the specific procedure which CA Dabu
should follow to evaluate the adequacy of work performed by Mr. Jay.
[May 19-New Syllabus (5 Marks)]

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Answer: Evaluation of Work of Auditor’s expert:
• As per SA 620 ““Using the work of an Auditor’s Expert” the
auditor shall evaluate the adequacy of the auditor’s expert’s
work for the auditor’s purposes, including:
(a) The relevance and reasonableness of that expert’s
findings or conclusions, and their consistency with
other audit evidence;
(b) If that expert’s work involves use of significant
assumptions and methods, the relevance and
reasonableness of those assumptions and methods in the
circumstances; and
(c) If that expert’s work involves the use of source data that
is significant to that expert’s work, the relevance,
completeness, and accuracy of that source data.
• Specific procedures to evaluate the adequacy of the auditor’s
expert’s work for the auditor’s purposes may include:
(a) Inquiries of the auditor’s expert.
(b) Reviewing the auditor’s expert’s working papers and
reports.
(c) Corroborative procedures, such as:
• Observing the auditor’s expert’s work;
• Examining published data, such as statistical reports
from reputable, authoritative sources;
• Confirming relevant matters with third parties;

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• Performing detailed analytical procedures; and
• Re-performing calculations.
(d) Discussion with another expert with relevant expertise
when, for example, the findings or conclusions of the
auditor’s expert are not consistent with other audit
evidence.
(e) Discussing the auditor’s expert’s report with management.
Q.147 What are the procedures to be followed by a statutory auditor for
verifying the provisions for accrued liability for retirement benefits
which is based on a certificate of a reputed actuary engaged by the
auditor for the purpose.
Or
Explain the procedures to be performed for evaluating the work of
auditor’s expert.
Answer: Evaluation of Work of Auditor’s expert:
• As per SA 620 ““Using the work of an Auditor’s Expert” the

auditor shall evaluate the adequacy of the auditor’s expert’s
work for the auditor’s purposes, including:
(a) The relevance and reasonableness of that expert’s
findings or conclusions, and their consistency with
other audit evidence;
(b) If that expert’s work involves use of significant
assumptions and methods, the relevance and
reasonableness of those assumptions and methods in
the circumstances; and

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(c) If that expert’s work involves the use of source data that
is significant to that expert’s work, the relevance,
completeness, and accuracy of that source data.
• If the auditor determines that the work of the auditor’s expert
is not adequate for the auditor’s purposes, the auditor shall:
(a) Agree with that expert on the nature and extent of further
work to be performed by that expert; or
(b) Perform further audit procedures appropriate to the
circumstances.
Q.148 State your views on reference to an expert in the Auditor's report.
Answer: Reference of Expert in Auditor’s Report:
(a) SA 620 “Using the work of an Auditor’s Expert” deals with
the auditor’s responsibilities regarding the use of an
individual or organisation’s work in a field of expertise other
than accounting or auditing, when that work is used to assist
the auditor in obtaining sufficient appropriate audit
evidence.
(b) With respect to reference of Expert in Auditor’s Report, SA
620 provides the following:
• The auditor shall not refer to the work of an auditor’s
expert in an auditor’s report containing an unmodified
opinion unless required by law or regulation to do so.

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• If such reference is required by law or regulation, the
auditor shall indicate in the auditor’s report that the
reference does not reduce the auditor’s responsibility for
the audit opinion.
(c) If the auditor makes reference to the work of an auditor’s
expert in the auditor’s report because such reference is
relevant to an understanding of a modification to the
auditor’s opinion, the auditor shall indicate in the auditor’s
report that such reference does not reduce the auditor’s
responsibility for that opinion.
Q.149 O Ltd. is in the business of manufacturing of steel. The manufacturing
process requires raw material as iron ore for which large stock was
maintained by the company at year end – 31 March 2020. The nature
of raw material is such that its physical verification requires
involvement of an expert. Management hired their expert for stock
take and auditors also involved auditor’s expert for the stock take.
The auditor observed that the work of the auditor’s expert was not
adequate for auditor’s purposes and the auditor could not resolve
the matter through additional audit procedures which included
further work performed by both the auditor’s expert and the auditor.
Basis above, the auditor concluded that it would be necessary to
express a modified opinion in the auditor’s report because the
auditor has not obtained sufficient appropriate audit evidence.

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However, the auditor issued a clean report and included the name of
the expert in his report to reduce his responsibility for the audit
opinion. Comment. [MTP-April 19]
Answer: Auditor’s responsibility in case of use of work of Auditor’s
Expert:
• As per SA 620, “Using the work of an Auditor’s Expert”, if the
auditor concludes that the work of the auditor’s expert is not
adequate for the auditor’s purposes and the auditor cannot
resolve the matter through the additional audit, which may
involve further work being performed by both the expert and
the auditor, or include employing or engaging another expert,
it may be necessary to express a modified opinion in the
auditor’s report in accordance with SA 705 because the
auditor has not obtained sufficient appropriate audit evidence
• In addition, the auditor shall not refer to the work of an
auditor’s expert in an auditor’s report containing an
unmodified opinion unless required by law or regulation to do
so. If such reference is required by law or regulation, the
auditor shall indicate in the auditor’s report that the reference
does not reduce the auditor’s responsibility for the audit
opinion.
• If the auditor makes reference to the work of an auditor’s
expert in the auditor’s report because such reference is
relevant to an understanding of a modification to the auditor’s

Page 245
opinion, the auditor shall indicate in the auditor’s report that
such reference does not reduce the auditor’s responsibility for
that opinion.
Conclusion: The auditor cannot reduce his responsibility by
referring the name of auditor’s expert and thereby issuing a
clean report. Auditor should have issued a modified report and
could have given reference to the work of an auditor’s expert in
that report if such reference was relevant to understanding of a
modification to the auditor’s opinion but even in that case the
auditor should have indicated in his report that such reference
of auditor’s expert does not reduce his responsibility for that
opinion.
1.31 - SA 700 “Forming an Opinion and Reporting on Financial Statements”
Q.150 Enumerate the basic elements of Audit Report as enshrined in SA
700.
Answer: Basic Elements of the Auditor’s Report:
As per SA 700 “Forming an Opinion and Reporting on Financial
Statements”, the auditor’s report includes the following basic
elements:
1. Title: Audit Report should have a title clearly stating that it is
a report of an independent auditor.

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2. Addressee: Audi Report is normally addressed to those for

whom Audit Report is prepared, i.e. shareholders or TCWG.
3. Opinion Section: This section states the auditor’s opinion on
true and fair view of financial statements. Opinion Section of
the Auditor’s Report shall also cover the following:
• Identify the entity whose FS have been audited.
• State that Financial Statements have been audited.
• Identify title of each statement that comprises F.S.
• Refer to the notes, including the summary of significant

accounting policies; and
• Specify date of period covered by each Financial Statement.
4. Basis for Opinion Section: The auditor’s report shall include

a section, directly following the Opinion section, with the
heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with
SA;
(b) Refers to the section of the auditor’s report that
describes the auditor’s responsibilities under the SAs;
(c) Includes a statement that the auditor is independent of
the entity in accordance with the relevant ethical
requirements relating to the audit, and has fulfilled the
auditor’s other ethical responsibilities in accordance
with these requirements. The statement shall refer to the
Code of Ethics issued by ICAI

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(d) States whether the auditor believes that the audit
evidence the auditor has obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion.
5. Going Concern: Where applicable, the auditor shall report in
6. Key Audit matters: For audits of complete set of general
purpose F.S. of listed entities, the auditor shall communicate
key audit matters in the auditor’s report in accordance with
SA 701.
7. Other Information: Where applicable, auditor shall report in
8. Management’s Responsibility for the Financial
Statements: Describe responsibility of Management for
preparation of Financial Statements in the manner in which
responsibility is described in Terms of Engagement.
9. Auditor’s Responsibility Section: It shall state the auditor’s
objectives to obtain reasonable assurance about whether the
F.S. as a whole are free from material misstatement, whether
due to fraud or error; and to Issue an auditor’s report that
includes the auditor’s opinion. This section also enumerates
the auditor’s responsibilities as prescribed under different
Standards on Auditing.
10. Other Reporting Responsibilities: This Section covers
reporting over those additional matters on which auditor is

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required to report under statutory requirements.
11. Signature of the Auditor: Audit report to be signed in
auditor’s personal name. Where firm appointed as auditor,
report signed in personal name & in name of audit firm.
12. Date of Auditor’s Report: It should not be earlier than date
on which auditor has obtained Sufficient Appropriate Audit
Evidence on which to base auditor’s opinion.
13. Place of signature: It is ordinarily the city where audit
report is signed.
Q.151 What is included in Auditor’s Responsibility Paragraph?
[May 17 (5 Marks)]
Answer: Auditor’s Responsibility Paragraph:
As per SA 700 “Forming an Opinion and Reporting on Financial
Statements”, the auditor’s responsibility paragraph shall state
the following:
(a) State that the objectives of the auditor are to obtain
reasonable assurance about whether the F.S. as a whole are
free from material misstatement, whether due to fraud or
error and issue an auditor’s report that includes the
auditor’s opinion.
(b) State that reasonable assurance is a high level of assurance
but is not a guarantee that an audit will always detect a
material misstatement when it exists.

Page 249
(c) State that misstatements can arise from fraud or error and
will be considered when appears material in accordance
with the applicable FRF.
(d) State that, as part of an audit in accordance with SAs, the
auditor exercises professional judgment and maintains
professional skepticism throughout the audit.
(e) Describe an audit by stating that the auditor’s
responsibilities are:
(i) To identify and assess the Risk of Material
Misstatements of the Financial statements, whether due
to fraud or error;
(ii) To design and perform audit procedures responsive to
those risks;
(iii) To obtain audit evidence that is sufficient and
appropriate to provide a basis for the auditor’s opinion.
(iv) To obtain an understanding of internal control relevant
to the audit in order to design audit procedures that are
appropriate in the circumstances
(v) To evaluate the appropriateness of accounting policies
used and the reasonableness of accounting estimates
and related disclosures made by management.
(vi) To conclude on the appropriateness of management’s
use of the going concern basis of accounting.

Many candidates were able to highlight only few matters included in Auditor’s
Responsibility paragraph. Some candidates unnecessarily discussed about
Management’s responsibility instead of Auditor’s responsibility

Page 250
Q.152 Write short note on: Unqualified opinion in the context of the
Auditor's report. [May 09 (4 Marks)]
Answer: Unqualified opinion:

SA 700 “Forming an opinion and Reporting on Financial
Statements” requires the auditor to express an unqualified
opinion when he concludes that the financial statements give a
true and fair view in accordance with the financial reporting
framework used for preparation and presentation of the
An unqualified opinion indicates the following:
1. The financial statements have been prepared using the

generally accepted accounting principles and being
constantly followed.
2. The financial statements comply with relevant statutory
requirements and regulations.
3. All material matters relevant to proper presentation of the
financial information, subject to statutory requirement, if
applicable, have been adequately disclosed.
Q.153 KPI Ltd. is a company on which International Standards on Auditing

are applicable along with Standard on Auditing issued by the ICAI.
The company appointed new auditors for the audit of the financial
statements for the year ended 31 March 2020 after doing all
appointment formalities. In the auditor’s report, auditor referred the
International Standard on Auditing in addition to the Standard on
Auditing issued by the ICAI.

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As an expert, you are required to advise the auditor regarding

auditor’s report for audits conducted in accordance with both the
Standards. [RTP-Nov. 19]
Answer: Auditor’s Report for Audits Conducted in Accordance with
Both Standards on Auditing Issued by ICAI and
International Standards on Auditing:
As per SA 700, “Forming an Opinion and Reporting on Financial
Statements”, an auditor may be required to conduct an audit in
accordance with the International Standards on Auditing, in
addition to the Standards on Auditing issued by ICAI. If this is
the case, the auditor’s report may refer to Standards on Auditing
in addition to the International Standards on Auditing, but the
auditor shall do so only if:
(a) There is no conflict between the requirements in the
International Auditing Standards and those in SAs that
would lead the auditor:
• to form a different opinion, or
• not to include an Emphasis of Matter paragraph or Other
Matter paragraph that, in the particular circumstances, is
required by SAs; and
(b) The auditor’s report includes, at a minimum, each of the
elements set out in Auditor’s Report Prescribed by Law or
Regulation discussed above when the auditor uses the layout
or wording specified by the Standards on Auditing.

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When the auditor’s report refers to both the ISAs and the
Standards on Auditing issued by ICAI, the auditor’s report shall
clearly identify the same including the jurisdiction of origin of
the other auditing standards.
1.32 – SA 701 “Communicating Key Audit Matters in the Independent
Auditor’s Report”
Q.154 Write a short note on: Purpose of communicating key audit matters.
[RTP - Nov.18]
Answer: Purpose of communicating key audit matters:
As per SA 701 “Communicating Key Audit matters in the

Independent Auditor’s Report” Key Audit Matters are those
matters that, in the auditor’s professional judgment, were of
most significance in the audit of the F.S. of the current period.
Key audit matters are selected from matters communicated with
TCWG.
Various purposes of Key audit matters may be listed as:
1. To enhance the communicative value of the auditor’s report

by providing greater transparency about the audit that was
performed.
2. To provide additional information to intended users of the
financial statements to assist them in understanding those

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3. To assist intended users in understanding the entity and areas
of significant management judgment in the audited F.S.
4. To provide a basis to further engage with management and
TCWG about certain matters relating to the entity, the audited
F.S. or the audit that was performed.
Q.155 Mr. A was appointed as statutory auditor of X Ltd. While doing audit,
Mr. A is required to determine the key audit matters which are
required to be mentioned in the audit report. You are required to
advise Mr. A about the considerations which Mr. A shall take into
account while determining key audit matters.
Or
“The auditor shall determine, from the matters communicated with
those charged with governance, those matters that required
significant auditor attention in performing the audit. In making this
determination, the auditor shall take into account the key factors”.
You are required to define key audit matters and briefly discuss the
factors determining the key audit matters. [RTP-April 18]
Or
As an auditor of a listed company for the year ended 31st March,
2020, how would you determine the ‘Key Audit Matters’?

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Answer: Considerations to determine Key Audit Matters:
TCWG.
The auditor shall determine, from the matters communicated
with TCWG, those matters that required significant auditor
attention in performing the audit. In making this determination,
the auditor shall consider the following:
(a) Areas of higher assessed RMM, or significant risks identified
in accordance with SA 315;
(b) Significant auditor judgments relating to areas in the F.S.
that involved significant management judgment, including
accounting estimates that have been identified as having
high estimation uncertainty.
(c) The effect on the audit of significant events or transactions
that occurred during the period.
The auditor shall determine which of the matters so determined
above were of most significance in the audit of the F.S. of the
current period and therefore are the key audit matters.

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Q.156 CA. Amar has come across certain key matters while auditing the
accounts of PR Ltd. for the financial year 2019-20. He, being the
associate of your firm, seeks your advice on “Communicating Key
Audit Matters” in the Auditor’s report. Guide him.
Answer: Communicating Key Audit Matters:
• As per SA 701 “Communicating Key Audit matters in the

Key audit matters are selected from matters communicated
with TCWG.
• The auditor shall describe each key audit matter, using an
appropriate subheading, in a separate section of the auditor’s
report under the heading “Key Audit Matters,”.
• The introductory language in this section of the auditor’s
report shall state that:
(a) Key audit matters are those matters that, in the auditor’s
professional judgment, were of most significance in the
audit of the financial statements of the current period; and
(b) These matters were addressed in the context of the audit
of the F.S. as a whole, and in forming the auditor’s opinion
thereon, and the auditor does not provide a separate
opinion on these matters.

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• The description of each key audit matter in the Key Audit
Matters section of the auditor’s report shall include a
reference to the related disclosure(s), if any, in the F.S. and
shall address:
(a) Why the matter was considered to be one of most
significance in the audit and therefore determined to be a
key audit matter; and
(b) How the matter was addressed in the audit.
• The auditor shall describe each key audit matter in the
auditor’s report unless:
(i) Law or regulation precludes public disclosure about the
matter; or
(ii) In extremely rare circumstances, the auditor determines
that the matter should not be communicated in the
auditor’s report because the adverse consequences of
doing so would reasonably be expected to outweigh the
public interest benefits of such communication. This shall
not apply if the entity has publicly disclosed information
about the matter.
• The auditor shall not communicate a matter in the Key Audit
Matters section of the auditor’s report when the auditor
would be required to modify the opinion in accordance with
SA 705 (Revised) as a result of the matter.

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Q.157 State the circumstances in which a matter determined to be a key
audit matter is not required to be communicated in the Auditor’s
Report.
Answer: Circumstances in which key audit matters not required to be
communicated:
TCWG.
The auditor shall describe each key audit matter in the auditor’s
report unless:
(a) Law or regulation precludes public disclosure about the
matter; or
(b) In extremely rare circumstances, the auditor determines
that the matter should not be communicated in the auditor’s
report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest
benefits of such communication. This shall not apply if the
entity has publicly disclosed information about the matter.
Q.158 The property, plant and equipment of ABC Ltd. included Rs. 25.75
crores of earth removing machines of outdated technology which had
been retired from active use and had been kept for disposal after

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knock down. These assets appeared at residual value and had been
last inspected ten years back. As an auditor, what may be your
reporting concern as regards matters specified above?
[May 18 – New Syllabus (5 Marks)]
Answer: Reporting Concerns in relation to significant events:
Auditor is required to report under the various requirements of
Standards of Auditing, legar and Regulatory provisions. In the
present situation, major reporting requirements will be:
(a) As per the requirement of SA 260 “Communication with
Those Charged with Governance” auditor should
communicate significant matters arising during the audit
that were discussed, or subject to correspondence, with
management.
(b) The situation as given in the question appears to be a Key
Audit Matter and hence auditor is required to report the
situation in the audit report as Key Audit Matter.
(c) Further as per requirement of Para 3(i) of CARO, 2016,
auditor is required to comment
(i) Whether the company is maintaining proper records
showing full particulars, including quantitative details
and situation of fixed assets
(ii) whether the fixed assets have been physically verified by
the management at reasonable intervals. In the present
case, physical verification of assets held under disposal.

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Conclusion: In the present case, auditor reporting concerns will
be as per the requirement of SA 260, SA 701 and Para 3(i) of
CARO, 2016.
Alternative Answer: Answer of this question may also be
based on the reporting issues like Valuation, Accounting
and Disclosures as per the requirements of applicable FRF.
In that case, if auditor is not satisfied with the valuation,
accounting and disclosures, he may qualify the report as per
the requirements of SA 705.
Q.159 AKY Ltd. is a listed company engaged in the business of software and
is one of the largest company operating in this sector in India. The
company’s annual turnover is Rs. 40,000 crores with profits of Rs.
5,000 crores. Due to the nature of the business and the size of the
company, the operations of the company are spread out in India as
well as outside India. The company’s contracts with its various
customers are quite complicated and different. During the course of
the audit, the audit team spends significant time on audit of revenue
– be it planning, execution or conclusion. This matter was also
discussed with management at various stages of audit. The efforts
towards audit of revenue also involve significant involvement of
senior members of the audit team including the audit partner. After
completion of audit for the year ended 31 March 2019, the audit
partner was discussing significant matters with the management
wherein they also communicated to the management that he plans to

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include revenue recognition as key audit matter in his audit report.
The management did not agree with revenue recognition to be
shown as key audit matter in the audit report. Comment.
[MTP – Oct. 19]
Answer: Determining Key Audit Matters:
SA 701, “Communicating Key Audit Matters in the Independent
Auditor’s Report”, deals with the auditor’s responsibility to
communicate key audit matters in the auditor’s report. As per SA
701, the auditor shall determine, from the matters
communicated with TCWG, those matters that required
significant auditor attention in performing the audit. In making
this determination, the auditor shall take into account the
following:
(i) Areas of higher assessed risk of material misstatement, or
significant risks identified in accordance with SA 315
Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its
Environment.
(ii) Significant auditor judgments relating to areas in the
financial statements that involved significant management
judgment, including accounting estimates that have been
identified as having high estimation uncertainty.
(iii) The effect on the audit of significant events or transactions
that occurred during the period.

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The auditor shall determine which of the matters determined in
accordance with above were of most significance in the audit of
the financial statements of the current period and therefore are
the key audit matters.
In the instant case, AKY Ltd., a listed company engaged in the
business of software and its contracts with its various customers
are also quite complicated and different. Further, the audit team
spends significant time on audit of revenue and efforts towards
audit of revenue also involve significant involvement of senior
members of the audit team including audit partner during audit.
This matter was also discussed with management at various
stages. After completion of audit, the audit partner
communicated the management regarding inclusion of
paragraph on revenue recognition as key audit matter in his
audit report.
Conclusion: Assessment of the auditor is valid as concerned
matter qualifies to be a key audit matter; hence, it should be
reported accordingly by the auditor in his audit report.
1.33 - SA 705 “Modifications to the Opinion in the Independent Auditor’s
Report”
Q.160 When should an auditor make a disclaimer opinion in his Audit
report? [May 09 (5 Marks)]

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Answer: Disclaimer of Opinion:
SA 705 “Modification to the Opinion in the Independent
Auditor’s Report” requires the auditor to disclaim an opinion
• when the auditor is unable to obtain sufficient appropriate
audit evidence on which to base the opinion, and
• the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be both
material and pervasive.
If auditor disclaims the opinion auditor is required to add a para
in the audit report “Basis for Disclaimer of Opinion Para”
describing therein the auditor’s inability to collect the sufficient
appropriate audit evidence.
Auditor is also required to amend the description of auditor’s
responsibility para as “Our responsibility is to express an
opinion on the financial statements based on conducting the
audit in accordance with Standards on Auditing issued by the
ICAI. Because of the matter(s) described in the Basis for
Disclaimer of Opinion paragraph, however, we were not able to
obtain sufficient appropriate audit evidence to provide a basis
for an audit opinion”.
Q.161 Under the applicable Standards on Auditing, in what circumstances
does the report of the statutory auditor require modifications? What
are the types of modifications possible to the said report?

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[Nov. 12 (8 Marks)]
Or
Explain the circumstances which require a modification to the
Auditor’s Opinion. [Nov. 17 (6 Marks)]
Or
If financial statements prepared in accordance with the
requirements of a fair presentation framework do not achieve fair
presentation, the auditor shall discuss the matter with management
and, depending on the requirements of the applicable financial
reporting framework and how the matter is resolved, shall
determine whether it is necessary to modify the opinion in the
auditor's report in accordance with SA 705.
Under SA 705, in what circumstances does the report of the statutory
auditor require modifications? What are the types of modifications
possible in the said report?
Or
ADKS & Co LLP are the newly appointed statutory auditors of PKK
Ltd. During the course of audit, the statutory auditors have come
across certain significant observations which they believe could lead
to material misstatement of financial statements. Management has a
different view and does not concur with the view of the statutory
auditors. Considering this the statutory auditors are determining as
to how to address these observations in terms of their reporting
requirement. Please advise. [MTP-April 19]

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Answer: Circumstances in which a modified opinion may be issued:
As per SA 705 “Modifications to the Opinion in the Independent
Auditor’s Report” a modified opinion may be expressed in the
following circumstances:
(a) The auditor concludes that, based on the audit evidence
obtained, the F.S. as a whole are not free from material
misstatement, may be due to following reasons:
➢ Inappropriate method of selection of Accounting
Policies;
➢ Accounting policies are not consistent with applicable
FRF;
➢ Disclosures as required by FRF are not given.
(b) The auditor is unable to obtain sufficient appropriate audit
evidence to conclude that the financial statements as a whole
are free from material misstatement, may be due to
following reasons:
➢ Limitations imposed by management
➢ Circumstances beyond entity control (For Ex.:
Accounting records destroyed by fire)
➢ Circumstances related to Nature and Timing of auditor’s
work.
Types of Modified Opinion:
(a) Qualified opinion: It is issued under following
circumstances:

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• Financial statements are materially misstated which in the
auditor’s judgments are not pervasive.
• Auditor is unable to obtain Sufficient and appropriate
audit evidence which in the auditor judgment are not
pervasive
(b) Adverse Opinion: It is issued when financial statements are
materially misstated which in the auditor’s judgments is
having pervasive effect.
(c) Disclaimer of Opinion: It is issued when auditor is unable
to obtain Sufficient and appropriate audit evidence which in
the auditor judgment are having pervasive effect.
Q.1 The auditor’s inability to obtain sufficient appropriate audit
evidence (also referred to as a limitation on the scope of the audit)
may arise from:
(i) Circumstances beyond the control of the entity;
(ii) Circumstances relating to the nature or timing of the auditor’s
work; or
(iii) Limitations imposed by management.
Explain with the help of examples. [RTP-May 20]
Answer: Examples of situations in which auditor is unable to obtain
sufficient and appropriate evidences
(A) Circumstances beyond entity control
(i) The entity’s accounting records have been destroyed.

Page 266
(ii) The accounting records of a significant component have
been seized indefinitely by governmental authorities.
(B) Circumstances related to Nature and Timing of
auditor’s work
(i) The entity is required to use the equity method of
accounting for an associated entity, and the auditor is
unable to obtain sufficient appropriate audit evidence
about the latter’s financial information to evaluate
whether the equity method has been appropriately
applied.
(ii) The timing of the auditor’s appointment is such that
the auditor is unable to observe the counting of the
physical inventories.
(iii) The auditor determines that performing substantive
procedures alone is not sufficient, but the entity’s
controls are not effective.
(C) Limitations imposed by management
(i) Management prevents the auditor from observing the
counting of the physical inventory.
(ii) Management prevents the auditor from requesting
external confirmation of specific account balances.

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Q.162 After accepting the statutory audit of M/s All in One Ltd., a
departmental store, you became aware of the fact that management
of the company have imposed certain limitations on the scope of
your assurance function which may adversely affect and result in
your inability to obtain sufficient appropriate audit evidence to
discharge your responsibility required by the statute. Indicate the
consequences and your response to the limitations imposed by the
management on your scope. [May 19 – New Syllabus (4 Marks)]
Answer: Limitation after the auditor has accepted the engagement:
• As per SA 705 “Modifications to the Opinion in the
Independent Auditor’s Report”, if, after accepting the
engagement, the auditor becomes aware that management has
imposed a limitation on the scope of the audit that the auditor
considers likely to result in the need to express a qualified
opinion or to disclaim an opinion on the financial statements,
the auditor shall request that management remove the
limitation.
• If management refuses to remove the limitation, the auditor
shall communicate the matter to those charged with
governance, unless all of those charged with governance are
involved in managing the entity, and determine whether it is
possible to perform alternative procedures to obtain sufficient
appropriate audit evidence.

Page 268
• If the auditor is unable to obtain sufficient appropriate audit
evidence, the auditor shall determine the implications as
follows:
(a) If the auditor concludes that the possible effects on the
financial statements of undetected misstatements, if any,
could be material but not pervasive, the auditor shall
qualify the opinion; or
(b) If the auditor concludes that the possible effects on the
financial statements of undetected misstatements, if any,
could be both material and pervasive so that a
qualification of the opinion would be inadequate to
communicate the gravity of the situation, the auditor shall:
(i) Withdraw from the audit, where practicable and
possible under applicable law or regulation; or
(ii) If withdrawal from the audit before issuing the
auditor’s report is not practicable or possible, disclaim
an opinion on the financial statements.
• If the auditor withdraws, before withdrawing, the auditor
shall communicate to those charged with governance any
matters regarding misstatements identified during the audit
that would have given rise to a modification of the opinion.
Q.163 “When the auditor modifies the audit opinion, the auditor shall use
the heading “Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of
Opinion,” as appropriate, for the Opinion section.” As an expert you

Page 269
are required to brief the special considerations required for
expressing:
(a) Qualified Opinion;
(b) Adverse Opinion and
(c) Disclaimer of Opinion. [RTP-Nov. 18, May 20]
Answer: Special Considerations required for modified opinion:
(a) Special consideration required for expressing Qualified
Opinion:
When the auditor expresses a qualified opinion due to a
material misstatement in the financial statements, the auditor
shall state that, in the auditor’s opinion, except for the effects
of the matter(s) described in the Basis for Qualified Opinion
section:
(i) When reporting in accordance with a fair
presentation framework, the accompanying financial
statements present fairly, in all material respects (or give
a true and fair view of) […] in accordance with [the
applicable FRF]; or
(ii) When reporting in accordance with a compliance
framework, the accompanying financial statements
have been prepared, in all material respects, in
accordance with [the applicable FRF].

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When the modification arises from an inability to obtain
sufficient appropriate audit evidence, the auditor shall use
the corresponding phrase “except for the possible effects of
the matter(s) ...” for the modified opinion.
(b) Special consideration needed for expressing Adverse
Opinion:
When the auditor expresses an adverse opinion, the auditor
shall state that, in the auditor’s opinion, because of the
significance of the matter(s) described in the Basis for
Adverse Opinion section:
(i) When reporting in accordance with a fair
presentation framework, the accompanying financial
statements do not present fairly (or give a true and fair
view of) […] in accordance with [the applicable FRF]; or
(ii) When reporting in accordance with a compliance
framework, the accompanying financial statements
have not been prepared, in all material respects, in
accordance with [the applicable FRF].
(c) Special consideration is required for expressing
Disclaimer of Opinion: When the auditor disclaims an
opinion due to an inability to obtain sufficient appropriate
audit evidence, the auditor shall:
(i) State that the auditor does not express an opinion on the
accompanying financial statements;

Page 271
(ii) State that, because of the significance of the matter(s)
described in the Basis for Disclaimer of Opinion section,
the auditor has not been able to obtain sufficient
appropriate audit evidence to provide a basis for an audit
opinion on the financial statements; and
(iii)Amend the statement required in SA 700 (Revised),
which indicates that the financial statements have been
audited, to state that the auditor was engaged to audit the
Unless required by law or regulation, when the auditor
disclaims an opinion on the financial statements, the auditor’s
report shall not include a Key Audit Matters section in
Q.164 “The Company’s has been unable to re-negotiate or obtain
replacement financing. This situation indicates the existence of a
material uncertainty that may cast significant doubt on the
Company’s ability to continue as a going concern and therefore, the
Company may be unable to realize its assets and discharge its
liabilities in the normal course of business. The financial statements
(and notes thereto) do not fully disclose this fact.” You are required
to identify the type of opinion and draft the same.
Answer: Type of Opinion to be expressed:
As per SA 570 “Going Concern” if adequate disclosure about the
material uncertainty is not made in the F.S., the auditor shall:

Page 272
(a) Express a qualified opinion or adverse opinion, as
appropriate, in accordance with SA 705; and
(b) In the Basis for Qualified (Adverse) Opinion section of the
auditor’s report, state that a material uncertainty exists that
may cast significant doubt on the entity’s ability to continue
as a going concern and that the F.S. do not adequately
disclose this matter.
In the present case, Company’s has been unable to re-negotiate
or obtain replacement financing. This situation indicates the
existence of a material uncertainty that may cast significant
doubt on the Company’s ability to continue as a going concern
and therefore, the Company may be unable to realize its assets
and discharge its liabilities in the normal course of business. The
financial statements (and notes thereto) do not fully disclose
this fact. This situation requires the auditor to express a
qualified opinion.
Draft Opinion Para:
In our opinion, except for the incomplete disclosure of the
information referred to in the Basis for Qualified Opinion
paragraph, the financial statements give the information
required by the Companies Act, 2013, in the manner so required
and give a true and fair view in conformity with the accounting
principles generally accepted in India:

Page 273
a. in the case of the Balance Sheet, of the state of affairs of the
company as at March 31, 20X1;
b. in the case of the Profit and Loss Account, of the profit/loss for
the year ended on that date; and
c. in the case of the cash flow statement, of the cash flows for the
year ended on that date.
Q.165 The Company’s financing arrangements expired and the amount
outstanding was payable on March 31, 20X0. The Company has been
unable to re-negotiate or obtain replacement financing and is
considering filing for bankruptcy. These events indicate a material
uncertainty that may cast significant doubt on the Company’s ability
to continue as a going concern and therefore it may be unable to
realize its assets and discharge its liabilities in the normal course of
business. The financial statements (and notes thereto) do not
disclose this fact.” You are required to identify the type of opinion
and draft the same.
Answer: Type of Opinion to be expressed:
As per SA 570 “Going Concern” If the financial statements have
been prepared using the going concern basis of accounting but,
in the auditor’s judgment, management’s use of the going
concern basis of accounting in the preparation of the F.S. is
inappropriate, the auditor shall express an adverse opinion.
In the present case, financing arrangements of the company
expired and the Company has been unable to re-negotiate or

Page 274
obtain replacement financing and is considering filing for
bankruptcy. This indicates that going concern of the entity is not
maintainable. Under these situations, auditor is required to
express an adverse opinion as per SA 705.
Draft Opinion Para:
In our opinion, because of the omission of the information
mentioned in the Basis for Adverse Opinion paragraph, the
financial statements do not give the information required by the
Companies Act, 2013, in the manner so required and also, do not
give a true and fair view in conformity with the accounting
principles generally accepted in India:
(a) in the case of the Balance Sheet, of the state of affairs of the
company as at March 31, 20X0; and
(b) in the case of the Profit and Loss Account, of the profit/loss
for the year ended on that date; and
(c) in the case of the cash flow statement, of the cash flows for
the year ended on that date.
Q.166 As an auditor of ABC Limited, in view of given circumstances, you are
required to draft qualified opinion and basis for qualified opinion
due to the departure from the applicable Financial Reporting
Framework:
• Audit of a complete set of financial statements of a company other
than a listed company (registered under the Companies Act,
2013) using a fair presentation framework.

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• The financial statements are prepared by management of the
entity in accordance with the Accounting Standards prescribed
under section 133 of the Companies Act, 2013 (a general purpose
framework).
• The terms of the audit engagement reflect the description of
management’s responsibility for the financial statements in SA
210.
• A departure from the applicable financial reporting framework
resulted in a qualified opinion.
• The relevant ethical requirements that apply to the audit are the
ICAI’s Code of Ethics and the provisions of the Companies Act,
2013.
• Based on the audit evidence obtained, the auditor has concluded
that a material uncertainty does not exist related to events or
conditions that may cast significant doubt on the entity’s ability to
continue as a going concern in accordance with SA 570 (Revised).
• Between the date of the financial statements and the date of the
auditor’s report, there was a fire in the entity’s production
facilities, which was disclosed by the entity as a subsequent event.
In the auditor’s judgment, the matter is of such importance that it
is fundamental to users’ understanding of the financial
statements. The matter did not require significant auditor
attention in the audit of the financial statements in the current
period.

Page 276
• The auditor is not required, and has otherwise not decided, to
communicate key audit matters in accordance with SA 701.
• Those responsible for oversight of the financial statements differ
from those responsible for the preparation of the financial
statements.
• In addition to the audit of the financial statements, the auditor
has other reporting responsibilities required under the
Companies Act, 2013. [MTP-Aug. 18]
Answer: Qualified Opinion:
We have audited the standalone financial statements of ABC
Limited (“the Company”), which comprise the balance sheet as
at March 31, 20X1, and the statement of Profit and Loss,
(statement of changes in equity) and the statement of cash flows
for the year then ended, and notes to the financial statements,
including a summary of significant accounting policies and other
explanatory information (in which are included the Returns for
the year ended on that date audited by the branch auditors of
the Company’s branches located at (location of branches))2.
In our opinion and to the best of our information and according
to the explanations given to us, except for the effects of the
matter described in the Basis for Qualified Opinion section of our
report, the aforesaid financial statements present fairly, in all
material respects, or give a true and fair view in conformity with
the accounting principles generally accepted in India of the state

Page 277
of affairs of the Company as at March 31st, 2XXX and profit/loss,
(changes in equity) and its cash flows for the year ended on that
date.
Basis for Qualified Opinion
The Company’s short-term marketable securities are carried in
the statement of financial position at xxx. Management has not
marked these securities to market but has instead stated them at
cost, which constitutes a departure from the Accounting
Standards prescribed in section 133 of the Companies Act, 2013.
The Company’s records indicate that had management marked
the marketable securities to market, the Company would have
recognized an unrealized loss of Rs. xxx in the statement of
comprehensive income for the year. The carrying amount of the
securities in the statement of financial position would have been
reduced by the same amount at March 31, 20X1, and income tax,
net income and shareholders’ equity would have been reduced
by Rs. xxx, Rs. xxx and Rs. xxx, respectively.
We conducted our audit in accordance with Standards on
Auditing (SAs). Our responsibilities under those standards are
further described in the Auditor’s Responsibilities for the Audit of
the Financial Statements section of our report. We are
independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial
statements under the provisions of the Companies Act, 2013,

Page 278
and we have fulfilled our other ethical responsibilities in
accordance with these requirements and the ICAI’s Code of
Ethics. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our qualified
opinion.
Q.167 As an auditor of XYZ Limited, in view of given circumstances, you are
required to draft Adverse Opinion and basis for adverse opinion due
to a Material Misstatement of the Consolidated Financial Statements.
• Audit of a complete set of consolidated financial statements of a
listed company (incorporated under the Companies Act, 2013)
using a fair presentation framework. The audit is a group audit of
an entity with subsidiaries (i.e., SA 600 applies).
• The consolidated financial statements are prepared by
management of the entity in accordance with the Accounting
Standards prescribed under section 133 of the Companies Act,
2013 (a general purpose framework).
management’s responsibility for the consolidated financial
statements in SA 210.
• The consolidated financial statements are materially misstated
due to the non-consolidation of a subsidiary. The material
misstatement is deemed to be pervasive to the consolidated
financial statements. The effects of the misstatement on the
consolidated financial statements have not been determined

Page 279
because it was not practicable to do so (i.e., an adverse opinion is
appropriate).
• The relevant ethical requirements that apply to the audit are the
ICAI’s Code of Ethics and the provisions of the Companies Act,
2013.
• Based on the audit evidence obtained, the auditor has concluded
that a material uncertainty does not exist related to events or
conditions that may cast significant doubt on the entity’s ability to
continue as a going concern in accordance with SA 570 (Revised).
• SA 701 applies; however, the auditor has determined that there are
no key audit matters other than the matter described in the Basis
for Adverse Opinion section.
• Those responsible for oversight of the consolidated financial
statements differ from those responsible for the preparation of the
consolidated financial statements.
• In addition to the audit of the consolidated financial statements,
the auditor has other reporting responsibilities required under the
Companies Act, 2013. [MTP-April 18]
Answer: Adverse Opinion:
We have audited the accompanying consolidated financial
statements of XYZ Company Limited (hereinafter referred to as
the “Holding Company”) and its subsidiaries (the Holding
Company and its subsidiaries together referred to as “the
Group”), its associates and jointly controlled entities, which

Page 280
comprise the consolidated balance sheet as at March 31, 2XXX,
the consolidated statement of profit and Loss, (consolidated
statement of changes in equity){where applicable} and the
consolidated statement of cash flows for the year then ended,
and notes to the consolidated financial statements, including a
summary of significant accounting policies (hereinafter referred
to as the “consolidated financial statements”).
to the explanations given to us, because of the significance of the
matter discussed in the Basis for Adverse Opinion section of our
report, the accompanying consolidated financial statements do
not give a true and fair view in conformity with the accounting
principles generally accepted in India, of their consolidated state
of affairs of the Group, its associates and jointly controlled
entities, as at March 31, 20XX, of its consolidated profit/loss,
(consolidated position of changes in equity) ){where applicable}
and the consolidated cash flows for the year then ended.
Basis for Adverse Opinion
As explained in Note X, the Group has not consolidated

subsidiary PQR Company that the Group acquired during 20XX
because it has not yet been able to determine the fair values of
certain of the subsidiary’s material assets and liabilities at the
acquisition date. This investment is therefore accounted for on a
cost basis. Under the accounting principles generally accepted in
India, the Group should have consolidated this subsidiary and

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accounted for the acquisition based on provisional amounts. Had

PQR Company been consolidated, many elements in the
accompanying consolidated financial statements would have
been materially affected. The effects on the consolidated
financial statements of the failure to consolidate have not been
determined.
We conducted our audit in accordance with Standards on
Auditing (SAs) specified under section 143(10) of the
Companies Act, 2013. Our responsibilities under those
Standards are further described in the Auditor’s Responsibilities
for the Audit of the Consolidated Financial Statements section of
our report. We are independent of the Group, its associates and
jointly controlled entities, in accordance with the Code of Ethics
and provisions of the Companies Act, 2013 that are relevant to
our audit of the consolidated financial statements in India under
the Companies Act, 2013, and we have fulfilled our other ethical
responsibilities in accordance with the Code of Ethics and the
requirements under the Companies act, 2013. We believe that
the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our adverse opinion.
Q.168 As an auditor of ABC Limited, in view of given circumstances, you are
required to draft disclaimer of opinion and basis for disclaimer of
opinion due to the Auditor’s Inability to Obtain Sufficient
Appropriate Audit Evidence about Multiple Elements of the Financial
Statement.

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• Audit of a complete set of financial statements of an entity other
than a company incorporated under the Companies Act, 2013,
using a fair presentation framework. The audit is not a group audit
(i.e., SA 600, does not apply).
• The financial statements are prepared by management of the
entity in accordance with the Accounting Standards issued by the
Institute of Chartered Accountants of India (a general purpose
framework).
management’s responsibility for the financial statements in SA
210.
• The auditor was unable to obtain sufficient appropriate audit
evidence about multiple elements of the financial statements, that
is, the auditor was also unable to obtain audit evidence about the
entity’s inventories and accounts receivable. The possible effects of
this inability to obtain sufficient appropriate audit evidence are
deemed to be both material and pervasive to the financial
statements.
• The relevant ethical requirements that apply to the audit are ICAI’s
Code of Ethics and applicable law/regulation
• Those responsible for oversight of the financial statements differ
from those responsible for the preparation of the financial
statements.

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• A more limited description of the auditor’s responsibilities section
is required.
• In addition to the audit of the financial statements, the auditor has
other reporting responsibilities required under relevant law/
regulation.
Answer: Disclaimer of Opinion:
We were engaged to audit the financial statements of ABC &
Associates (“the entity”), which comprise the balance sheet as at
March 31, 20XX, the statement of Profit and Loss, (the statement
of changes in equity)(where applicable) and statement of cash
flows for the year then ended, and notes to the financial
statements, including a summary of significant accounting
policies.
We do not express an opinion on the accompanying financial
statements of the entity. Because of the significance of the
matters described in the Basis for Disclaimer of Opinion section
of our report, we have not been able to obtain sufficient
appropriate audit evidence to provide a basis for an audit
opinion on these financial statements.
Basis for Disclaimer of Opinion
We were not appointed as auditors of the Company until after
March 31, 20X1 and thus did not observe the counting of
physical inventories at the beginning and end of the year. We
were unable to satisfy ourselves by alternative means

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concerning the inventory quantities held at March 31, 20X0 and
20X1, which are stated in the Balance Sheets at Rs. xxx and Rs.
xxx, respectively. In addition, the introduction of a new
computerized accounts receivable system in September 20X1
resulted in numerous errors in accounts receivable. As of the
date of our report, management was still in the process of
rectifying the system deficiencies and correcting the errors. We
were unable to confirm or verify by alternative means accounts
receivable included in the Balance Sheet at a total amount of Rs.
xxx as at March 31, 20X1. As a result of these matters, we were
unable to determine whether any adjustments might have been
found necessary in respect of recorded or unrecorded
inventories and accounts receivable, and the elements making
up the statement of Profit and Loss (and statement of cash
flows)( Where applicable).
Q.169 As an auditor of a company registered under section 8 of the
Companies Act, 2013 you find that as per the notification of the
Ministry of Corporate Affairs regarding applicability of Indian
Accounting Standards (Ind-AS), the company has to prepare its
financial statements for the year ended 31st March, 2020 under Ind-
AS. The management of the company is however of the strong view
that being a section 8 company having charitable objects, Ind-AS
cannot apply to the company. The financial statements are therefore
prepared by the management under the earlier GAAP and a note for

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the same is given in the financial statements. How would you report
on these financial statements? [Nov. 17 (5 Marks), MTP-Aug. 18]
Answer: Reporting on financial statements:

As per SA 200 “Overall Objectives of the Independent Auditor
and Conduct of Audit in accordance with Standards on Auditing”
in conducting an audit of financial statements, the overall
objectives of the auditor are:
(a) To obtain reasonable assurance about whether the F. S. as a

whole are free from material misstatement, whether due to
fraud or error, thereby enabling the auditor to express an
opinion on whether the F.S. are prepared, in all material
respects, in accordance with an applicable FRF, and
(b) To report on the F.S. and communicate as required by the
SAs, in accordance with the auditor’s findings.
In all cases when reasonable assurance cannot be obtained and a

qualified opinion in the auditor’s report is insufficient, the SAs
require that the auditor disclaim an opinion or withdraw from
the engagement.
In the present case, company was required to prepare its
financial statements as per Ind-AS, but the financial statements
are being prepared under the earlier GAAP. FRF followed by the
company is not acceptable.
Conclusion: Financial reporting framework applied by the
management is unacceptable and hence auditor is required to
disclaim the opinion in accordance with SA 705 or withdraw
from the engagement.

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Note: Answer given in Suggested Answer of ICAI is based on
the provisions of Sec. 129 and Sec. 133 and specifies that the
auditor is required to ensure applicable monetary limits w.r.t.
Ind-AS and advise the management to prepare the F.S. as per
Ind-AS.
Answer given in suggested answer does not seems to be
appropriate as requirement of question was how the auditor
report on such financial statements, whereas answer is given
on applicability of Ind-AS as per legal requirements of
company law.
Examiner comment on this answer was: Examinees did not
discuss the requirements of section 133 and section 129 of the
Companies Act, 2013, that Companies registered under Section
8 are not exempted from the complying with Ind AS while
preparation of their financial statements. Only selected
examinees mentioned that the auditor is required to ensure
the applicable monetary limits with respect to applicability of
Ind-AS. Few examinees answered wrongly in the pretext on
applicability of the Accounting standards to Charitable
organisation whereas the question is on the applicability of
Ind-AS to section 8 companies.

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1.34 - SA 706 “Emphasis of Matter Paragraph and Other Paragraphs in the
Independent Auditor’s Report”
Q.170 Write short note on: Emphasis of Matter paragraph in Audit Report.
Answer: Emphasis of Matter Para in Audit Report:
• As per 706 “Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report” Emphasis of
Matter is a paragraph of Matter is a paragraph which is
included in auditor’s report to draw users’ attention to
important matter(s) which are already disclosed in Financial
Statements and are fundamental to users’ for understanding
of Financial Statements.
• EOM is used when there is a uncertainty relating to future
outcome of exceptional litigation, regulatory action, etc.; or
there is early application (where permitted) of a new
accounting standard that has a pervasive effect on the
financial statements in advance of its effective date.
• Auditor shall include an Emphasis of Matter paragraph in the
auditor’s report provided:
(a) The auditor would not be required to modify the opinion
in accordance with SA 705 as a result of the matter; and
(b) When SA 701 applies, the matter has not been
determined to be a key audit matter to be communicated
in the auditor’s report.

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• When the auditor includes an EOM paragraph in the auditor’s
report, the auditor shall:
(a) Include the paragraph within a separate section of the
auditor’s report with an appropriate heading that
includes the term “Emphasis of Matter”;
(b) Include in the paragraph a clear reference to the matter
being emphasized and to where relevant disclosures that
fully describe the matter can be found in the financial
statements. The paragraph shall refer only to information
presented or disclosed in the financial statements; and
(c) Indicate that the auditor’s opinion is not modified in
respect of the matter emphasized.
Q.171 Beta Limited, is a company registered with SEBI, having five
subsidiaries. M/s XYZ, Chartered Accountants, have been appointed
as Statutory Auditors for the audit of the consolidated Financial
Statements for the year ending March 31, 2019. Out of five
subsidiaries, the audit of one subsidiary was conducted by another
auditor, M/s Badnam and Company, Chartered Accountants. The
“Opinion” para of audit report furnished by M/s XYZ Chartered
Accountants is given below:
Opinion
In Our opinion and to the best of our information and according to
the explanations given to us the consolidated financial statements
give a true and fair view, except the financial statement of one

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subsidiary whose accounts were audited by M/s Badnam and
company, Chartered Accountants and about the same we are not in a
position to express our opinion as the audit has not been performed
by us:
(i) In the case of the consolidated Balance Sheet, of the state of
affairs of the company as at March 31, 2019.
(ii) In the case of the consolidated profit and loss account, of the
profit/loss for the year ended on that date
Do you find any deficiencies in the opinion para? If yes, you are
required to give your suggestions and redraft the opinion para.
[Nov. 13 (5 Marks)]
Answer: Identification of deficiencies in opinion Para:
The opinion para contains the following deficiencies:
1. Out of five subsidiaries, the audit of one subsidiary was
conducted by another auditor, M/s Badnam and Company -
needs to be reported in other matter para.
2. Opinion regarding cash flow statement has not been covered.
As per SA 700 & 706 the redrafted opinion para and other
matter para are given hereunder:
Opinion Para
to the explanations given to us and based on the consideration of
the reports of the other auditors on the financial statements of
the subsidiaries as noted below, the consolidated financial

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statements give a true and fair view in conformity with the
accounting principles generally accepted in India:
(a) in the case of the consolidated Balance Sheet, of the state of
affairs of the Company as at March 31, 2019;
(b) in the case of the consolidated Profit and Loss Account, of
the profit/ loss for the year ended on that date; and
(c) in the case of the consolidated Cash Flow Statement, of the
cash flows for the year ended on that date.
Other Matter Para
We did not audit the financial statements of one subsidiary,
whose financial statements reflect total assets (net) of XXXX as
at March 31, 2019, total revenues of XXXX and net cash
outflows amounting to XXXX for the year then ended. These
financial statements have been audited by other auditor’s M/s
Badnam and Company, Chartered Accountants whose reports
have been furnished to us by the Management, and our opinion
is based solely on the reports of the other auditors. Our opinion
is not qualified in respect of this matter.
Q.172 Compare and Explain the following: Audit Qualification and
Emphasis of Matter. [Nov. 14 (3 Marks)]
Answer: Audit Qualification and Emphasis of Matter:
• SA 705 “Modifications to the Opinion in the Independent
Auditor’s Report”, deals with the provisions relating to Audit

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Qualification. Audit Qualifications are given when auditor is
having reservations on some of the items out of the financial
statements.
• It is issued under following circumstances:
(i) Financial statements are materially misstated which in the
auditor’s judgments are not pervasive.
(ii) Auditor is unable to obtain Sufficient and appropriate
audit evidence which in the auditor judgment are not
pervasive
Matter is a paragraph which is included in auditor’s report to
draw users’ attention to important matter(s) which are
already disclosed in Financial Statements and are fundamental
to users’ for understanding of Financial Statements.
• EOM is used when there is an uncertainty relating to future
outcome of exceptional litigation, regulatory action, etc.; or
there is early application (where permitted) of a new
accounting standard that has a pervasive effect on the
financial statements in advance of its effective date.
Q.173 D Ltd., a Delhi based company having turnover of Rs. 25 crores, has a
branch at USA having a turnover of Rs. 10 lakhs (as converted from
US dollars). The area where the branch office is located in USA was
severely affected by storms and the office along with all accounting

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records was completely destroyed. Due to the unavailability of
records, the financial statements of D Ltd. for the financial year 2019-
20 did not include the figures pertaining to the said branch. As the
statutory auditor of D Ltd., how will you report on the same?
[Nov. 17 (5 Marks)]
Answer: Reporting on financial statements when information of
component is not included:
• As per SA 200 “Overall Objectives of the Independent Auditor
and Conduct of Audit in accordance with Standards on
Auditing” in conducting an audit of financial statements, the
overall objective of the auditor is to obtain reasonable
assurance about whether the Financial statements as a whole
are free from material misstatement, whether due to fraud or
error, thereby enabling the auditor to express an opinion on
whether the financial statements are prepared, in all material
respects, in accordance with an applicable FRF. In all cases
when reasonable assurance cannot be obtained and a
qualified opinion in the auditor’s report is insufficient, the
SAs require that the auditor disclaim an opinion or withdraw
from the engagement.
• In the present case, D Ltd., a Delhi based company having
turnover of Rs. 25 crores, has a branch at USA having a
turnover of Rs. 10 lakhs (as converted from US dollars). The
area where the branch office is located in USA was severely

Page 293
affected by storms and the office along with all accounting
records was completely destroyed. Due to the unavailability
of records, the financial statements of D Ltd. for the financial
year 2018-19 did not include the figures pertaining to the
said branch.
• In the present situation, company is required to make
appropriate disclosures in the notes to accounts in this
regard. Based on the disclosures made in the financial
statements, auditor is required to include an Emphasis of
Matter Para in the auditor’s report as per requirement of SA
706. If, however no disclosure is made in the financial
statements, auditor need to qualify the audit report as
turnover of the branch is only Rs. 10 lakhs which does not
seems to have pervasive effect as the total turnover of the
company is Rs. 25 Crores.
Conclusion: If appropriate disclosures are given in Notes to
Accounts, an unmodified opinion with Emphasis of Matter para
need to be issued. However, if appropriate disclosures are not
given in Notes to Accounts, auditor should qualify the report in
Note: Answer given in Suggested Answer of ICAI is based on
the provisions of Sec. 143(8) and specifies who can conduct
branch audit.

Page 294
Answer given in suggested answer does not seems to be
appropriate as requirement of question was how the
auditor report, whereas content of answer is primarily on
the basis of who can conduct branch audit. In a case where
branch records are not available, then there is no logic of
mentioning the provisions relating to the concept of branch
audit. Answer need to be given from perspective of
company auditor, how to deal in such a situation.
Examiner comment on this answer was:Examinees lacked
knowledge in applying the required provisions of the
Companies Act, 2013 to the given question. Few examinees
have misunderstood the question and explained SA 600 on
‘Using the Work of Another Auditor.
Q.177 Enumerate certain important matters which can be included in
‘Emphasis of Matter Paragraph’ in an Auditor’s Report.
[Nov. 19 – Old syllabus (5 Marks)]
Answer: Matters which can be included in Emphasis of Matter
Paragraph in Auditor’s Report:

Matter is a paragraph of Matter is a paragraph which is
included in auditor’s report to draw users’ attention to
important matter(s) which are already disclosed in Financial
Statements and are fundamental to users’ for understanding

Page 295
of Financial Statements.
• Specific requirements for the auditor to include Emphasis of
Matter paragraphs in the auditor’s report in certain
circumstances. These circumstances include:
(a) When a FRF prescribed by law or regulation would be

unacceptable but for the fact that it is prescribed by law
or regulation.
(b) To alert users that the financial statements are prepared
in accordance with a special purpose framework.
(c) When facts become known to the auditor after the date
of the auditor’s report and the auditor provides a new or
amended auditor’s report (i.e., subsequent events).
• Matters which can be included in ‘Emphasis of Matter
Paragraph’ in an Auditor’s Report, may be listed as below:
(a) An uncertainty relating to the future outcome of an
exceptional litigation or regulatory action.
(b) A significant subsequent event that occurs between the
date of the financial statements and the date of the
auditor’s report.
(c) Early application (where permitted) of a new accounting
standard that has a pervasive effect on the financial
statements in advance of its effective date.
(d) A major catastrophe that has had, or continues to have, a
significant effect on the entity’s financial position.

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1.35 - SA 710 “Comparative Information – Corresponding Figures and
Comparative Financial Statements”
Q.174 Write short note on: Corresponding Figures. [May 13 (4 Marks)]
Answer: Refer answer of Q. No. 175
Q.175 What are the auditor’s responsibilities in respect of corresponding
figures? [May 10 (4 Marks)]
Or
Write short notes on the following: Auditor's responsibilities
regarding comparatives. [RTP-Nov. 18]
Answer: Auditor’s Procedures in respect of examination of
corresponding figures:
1. SA 710 “Comparative Information – Corresponding Figure
and Comparative Financial Information deals with the
auditor’s responsibilities regarding comparative
information in an audit of financial statements.
2. The term Corresponding Figures refers to Comparative
information where amounts and other disclosures for the
prior period, are included as an integral part of current
period F.S., and are intended to be read only in relation to
the amounts and other disclosures relating to the current
period.
3. To examine the corresponding figures, auditor is required
to perform the following procedures:

Page 297
(a) Determine whether F.S. include Comparative
information required by FRF, & Whether such
information is classified appropriately.
(b) Evaluate the following:
• Whether the comparative information agrees with
the amounts and other disclosures presented in the
prior period; and
• Whether the accounting policies reflected in the
comparative information are consistent with those
applied in the current period.
• Whether, changes in accounting policies, if any, have
been properly accounted for and adequately
presented and disclosed.
(c) In case, auditor has doubt over existence of Possible
Material Misstatement, then auditor is required to
perform additional audit procedures to obtain sufficient
appropriate audit evidence to determine existence of
material misstatement.
(d) Obtain Written Representation from management to re-
affirm that the Written Representation it previously
made with respect to the prior period remain
appropriate.

Page 298
Q.176 The audit report of P Ltd. for the year 2018-19 contained a
qualification regarding non-provision of doubtful debts. As the
statutory auditor of the company for the year 2019-20, how would
you report, if:
(a) The company does not make provision for doubtful debts in
2019-20?
(b) The company makes adequate provision for doubtful debts in
2019-20? [May 09 (8 Marks), Nov. 14 (5 Marks)]
Or
For the year ended 31st March, 2019, the audit report of Avinash Ltd.,
contained a qualification regarding non-provision for diminution in
the value of investments to the extent of Rs. 50 lacs. As an Auditor of
the Company for the year 2019-20, how would you report, if:
(i) The Company does not make provision for diminution in the
value of investments in the year 2019-2020.
(ii) The Company makes adequate provision for diminution in the
year 2018-2019. [May 18 – Old Syllabus (5 Marks)]
Answer: Auditor’s responsibilities w.r.t. Corresponding figures:
• As per SA 710, “Comparative Information – Corresponding

Figures and Comparative Financial Statements” When the
auditor’s report on the prior period, as previously issued,
included a modified opinion and the matter which gave rise to
the modified opinion is resolved and properly accounted for
or disclosed in the financial statements in accordance with the
applicable FRF, the auditor’s opinion on the current period
need not refer to the previous modification.

Page 299
• SA 710 further states that if the auditor’s report on the prior
period, as previously issued, included a modified opinion and the
matter which gave rise to the modification is unresolved, the
auditor shall modify the auditor’s opinion on the current period’s
• In the Basis for Modification paragraph in the auditor’s report, the
auditor shall either:
(i) Refer to both the current period’s figures and the
corresponding figures in the description of the matter giving
rise to the modification when the effects or possible effects of
the matter on the current period’s figures are material; or
(ii) In other cases, explain that the audit opinion has been
modified because of the effects or possible effects of the
unresolved matter on the comparability of the current period’s
figures and the corresponding figures.
Conclusion:
(a) If P Ltd. does not make provision the auditor will have to modify
his report for both current and previous year’s figures as
mentioned above.
(b) If however, the provision is made, the auditor need not refer to
the earlier year’s modification.

Page 300
Q.177 Mr. A, a practicing Chartered Accountant, audited the financial
statements of C Ltd. for the previous year 2019-20 and expressed an
unmodified opinion. C Ltd. was of the view that Mr. A is not
conducting the audit properly and therefore, for the current year
2019-20, it appointed Ms. B, a leading practicing Chartered
Accountant to conduct the audit and present Comparative Financial
Statements. Ms. B, while performing the auditing procedures, found
that C Ltd. has undercharged the wages of Rs. 10 lakhs during the
previous year resulting in overstatement of profits. What are the
further procedures, Ms. B is required to pursue?
Answer: Auditor’s Procedures in respect of examination of

comparative financial statements:
1. SA 710 “Comparative Information – Corresponding Figure
and Comparative Financial Information deals with the
auditor’s responsibilities regarding comparative
information in an audit of financial statements.
2. To examine the comparative information, auditor is
required to perform the following procedures:
• Determine whether F.S. include Comparative information

required by FRF, & Whether such information is classified
appropriately.
• Evaluate Whether the comparative information agrees

with the amounts and other disclosures presented in the
prior period; and

Page 301
3. In the present case, auditor identified material
misstatement for the previous year, financial statements of
which are audited by Mr. A. Ms. B Current Auditor is
required to discuss the matter with the management and
issue suitable report based on the action taken taken by the
management in this regard.
Conclusion: Ms. B is required to communicate the matter to
the management and request them to inform the same to Mr. A.
After revision or non-revision of the prior period’s financial
statements, Ms. B may report accordingly.
Q.178 It was observed from the modified audit report of the financial
statements of AS Ltd. for the year ended 31st March, 2019 that
depreciation of Rs. 2.50 crore for the year 2018-19 had been charged
off to the statement of Profit and Loss instead of including it in
“Carrying value of asset under construction”. State in relation to the
audit for the year ended 31st March 2020, whether such modification
in the previous year’s audit report would have any audit implication
for the current year and if yes, how would you deal with it in your
audit report? [Nov. 18-Old Syllabus (5 Marks)]
Answer: Impact of Modification in the predecessor auditor’s report:
• SA 710 “Comparative Information – Corresponding Figure and
Comparative Financial Information deals with the auditor’s
responsibilities regarding comparative information in an audit
of financial statements.

Page 302
• As per SA 710, if the auditor’s report on the prior period, as
previously issued, included a modified opinion and the matter
which gave rise to the modification is unresolved, the auditor
shall modify the auditor’s opinion on the current period’s
financial statements. In the Basis for Modification paragraph
in the auditor’s report, the auditor shall either:
(a) Refer to both the current period’s figures and the
corresponding figures in the description of the matter
giving rise to the modification when the effects or possible
effects of the matter on the current period’s figures are
material; or
(b) In other cases, explain that the audit opinion has been
modified because of the effects or possible effects of the
unresolved matter on the comparability of the current
period’s figures and the corresponding figures.
• Further, if the financial statements of the prior period were
audited by a predecessor auditor and the auditor is permitted
by law or regulation to refer to the predecessor auditor’s
report on the corresponding figures and decides to do so, the
auditor shall state in an Other Matter paragraph in the
auditor’s report:
(a) That the financial statements of the prior period were
audited by the predecessor auditor;

Page 303
(b) The type of opinion expressed by the predecessor auditor
and, if the opinion was modified, the reasons therefore;
and
(c) The date of that report.
• In the instant case, it was observed from the modified audit
report of the financial statements of AS Ltd. for the year ended
31st March, 2018 that depreciation of Rs. 2.50 crore for the
year 2017-18 had been charged off to the statement of Profit
and Loss instead of including it in “Carrying value of asset
under construction”.
Conclusion: Modification in the predecessor audit report will
impact the current period audit report and auditor shall deal in
accordance with SA 710 as mentioned above.
1.36 - SA 720 “The Auditor’s Responsibilities relating to Other Information.”
Q.179 SA 720 requires the auditor to read and consider the other
information because other information that is materially
inconsistent with the F.S. or the auditor’s knowledge obtained in the
audit may indicate that there is a material misstatement of the F.S. or
that a material misstatement of the other information exists, either
of which may undermine the credibility of the F.S. and the auditor’s
report thereon. Explain the meaning of the term Other Information
and state the requirements of SA 720 as to obtaining and considering
the other information.

Page 304
Answer: Other Information and Requirements of SA 720:

SA 720 “The Auditor’s Responsibilities relating to Other
Information” deals with the auditor’s responsibilities relating to
Other Information, whether financial or non-financial
information included in an entity’s annual report. SA 720 defines
the term other information as Financial or non-financial
information (other than F.S. and the auditor’s report thereon)
included in an entity’s annual report.
Requirements of SA 720 as to obtaining the other
information:
The auditor shall:
(a) Determine, through discussion with management, which
documents comprises the annual report, and the entity’s
planned manner and timing of the issuance of such
documents;
(b) Make appropriate arrangements with management to obtain
in a timely manner and, if possible, prior to the date of the
auditor’s report, the final version of the documents
comprising the annual report; and
(c) When some or all of the documents determined above will
not be available until after the date of the auditor’s report,
request management to provide a written representation
that the final version of the documents will be provided to
the auditor when available, and prior to its issuance by the
entity, such that the auditor can complete the procedures
required by this SA.

Page 305
Requirements of SA 720 as to considering the Other
information:
The auditor shall read the other information and, in doing so
shall:
(a) Consider whether there is a material inconsistency between
the other information and the financial statements. As the
basis for this consideration, the auditor shall, to evaluate
their consistency, compare selected amounts or other items
in the other information (that are intended to be the same as,
to summarize, or to provide greater detail about, the amounts
or other items in the financial statements) with such amounts
or other items in the financial statements; and
(b) Consider whether there is a material inconsistency between
the other information and the auditor’s knowledge obtained
in the audit, in the context of audit evidence obtained and
conclusions reached in the audit.
While reading the other information, the auditor shall remain
alert for indications that the other information not related to the
financial statements or the auditor’s knowledge obtained in the
audit appears to be materially misstated.
Q.180 Comment on the following: While reading the other information,
auditor finds certain misstatement of other information. Explain the
requirement of relevant SA w.r.t. Auditor’s responses in such a
situation.

Page 306
Answer: Auditor’s responses on a material misstatement in the Other
Information:
• SA 720 “The Auditor’s Responsibilities relating to Other
Information” deals with the auditor’s responsibilities relating
to Other Information, whether financial or non-financial
information included in an entity’s annual report.
• If the auditor concludes that a material misstatement of the
other information exists, the auditor shall request
management to correct the other information. If management:
(a) Agrees to make the correction, the auditor shall determine
that the correction has been made; or
(b) Refuses to make the correction, the auditor shall
communicate the matter with TCWG and request that the
correction be made.
• If the auditor concludes that a material misstatement exists in
other information obtained prior to the date of the auditor’s
report, and the other information is not corrected after
communicating with TCWG, the auditor shall take appropriate
action, including:
(a) Considering the implications for the auditor’s report and
communicating with TCWG about how the auditor plans to
address the material misstatement in the auditor’s report,
(b) Withdrawing from the engagement, where withdrawal is
possible under applicable law or regulation.

Page 307
• If the auditor concludes that a material misstatement exists in
other information obtained after the date of the auditor’s
report, the auditor shall:
(a) If the other information is corrected, perform the
procedures necessary in the circumstances; or
(b) If the other information is not corrected after
communicating with TCWG, take appropriate action
considering the auditor’s legal rights and obligations, to
seek to have the uncorrected material misstatement
appropriately brought to the attention of users for whom
the auditor’s report is prepared.
Q.185 LMP Associates, Chartered Accountants, conducting the audit of PQR
Ltd., a listed Company for the year ended 31st March, 2020 is
concerned with the auditor’s responsibilities relating to other
information, both financial and non-financial, included in the
Company’s annual report. While regarding other information, LMP
Associates considers whether there is a material inconsistency
between other. Information and the financial statements. As a basis
for the consideration the auditor shall evaluate their consistency,
compare selected amounts or other items in the other information
with such amounts or other items in the financial statements. Guide
LMP Associates with examples of “Amounts” or “other items” that
may be included in the “other information” with reference to SA 720.

Page 308
Answer: Reading and considering the Other information:
SA 720 “The Auditor’s Responsibilities relating to Other
Information” deals with the auditor’s responsibilities relating to
Other Information, whether financial or non-financial
information included in an entity’s annual report.
Other information may include amounts or other items that are
intended to be the same as, to summarize, or to provide greater
detail about, the amounts or other items in the financial
statements. Examples of such amounts or other items may
include:
(A) Amounts:
1. Items in a summary of key financial results, such as net
income, earnings per share, dividends, sales and other
operating revenues, and purchases and operating
expenses.
2. Selected operating data, such as income from continuing
operations by major operating area, or sales by
geographical segment or product line.
3. Special items, such as asset dispositions, litigation
provisions, asset impairments, tax adjustments,
environmental remediation provisions, and restructuring
and reorganization expenses.

Page 309
4. Liquidity and capital resource information, such as cash,
cash equivalents and marketable securities; dividends;
and debt, capital lease and minority interest obligations.
5. Capital expenditures by segment or division.
6. Amounts involved in, and related financial effects of, off-
balance sheet arrangements.
7. Amounts involved in guarantees, contractual obligations,
legal or environmental claims, and other contingencies.
8. Financial measures or ratios, such as gross margin, return
on average capital employed, return on average
shareholders’ equity, current ratio, interest coverage
ratio and debt ratio. Some of these may be directly
reconcilable to the financial statements.
(B) Other Items:
1. Explanations of critical accounting estimates and related
assumptions.
2. Identification of related parties and descriptions of
transactions with them.
3. Articulation of the entity’s policies or approach to manage
commodity, foreign exchange or interest rate risks, such
as through the use of forward contracts, interest rate
swaps, or other financial instruments.
4. Descriptions of the nature of off-balance sheet
arrangements.

Page 310
5. Descriptions of guarantees, indemnifications, contractual
obligations, litigation or environmental liability cases, and
other contingencies, including management’s qualitative
assessments of the entity’s related exposures.
6. Descriptions of changes in legal or regulatory
requirements, such as new tax or environmental
regulations, that have materially impacted the entity’s
operations or fiscal position, or will have a material
impact on the entity’s future financial prospects.
7. Management’s qualitative assessments of the impacts of
new financial reporting standards that have come into
effect during the period, or will come into effect in the
following period, on the entity’s financial results, financial
position and cash flows.
8. General descriptions of the business environment and
outlook.
9. Overview of strategy.
10. Descriptions of trends in market prices of key
commodities or raw materials.
11. Contrasts of supply, demand and regulatory
circumstances between geographic regions.
12. Explanations of specific factors influencing the entity’s
profitability in specific segments.

Page 311
Note: SA 800, 805, 810, SRE, SAE and SRS excluded from syllabus by ICAI vide
announcement dated 24.06.2019, 03.07.2019 and 22.07.2019
--------------------------

Page 312

Chapter 1 Quality Control and Engagement Standards-1

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Chapter 1 – Quality control and Engagement Standards ©www.altclasses.

Compiled by: Pankaj Garg

Historical Financial Information and Other Assurance and Related

Q.1 BSS & Associates is a partnership firm of Chartered Accountants which

Compiled by: Pankaj Garg

circumstances before accepting an engagement with a new client, when

Compiled by: Pankaj Garg

Answer: Considerations as to integrity of clients:

Reviews of Historical Financial Information, and Other

Assurance and Related Services Engagements” a firm should

establish a system of quality control designed to provide it with

reasonable assurance that the firm and its personnel comply

with professional standards and regulatory and legal

requirements, and that reports issued by the firm are

appropriate in the circumstances.

• Accordingly, the firm should obtain such information as it

considers necessary in the circumstances before accepting an

engagement with a new client, when deciding whether to

continue an existing engagement, and when considering

acceptance of a new engagement with an existing client. Where

issues have been identified, and the firm decides to accept or

continue the client relationship or a specific engagement, it

should document how the issues were resolved.

Considerations as to integrity of clients:

With regard to the integrity of a client, matters that the firm

considers include, for example:

1. The identity and business reputation of the client’s principal

owners, key management, related parties and those charged

with its governance.

Compiled by: Pankaj Garg

2. The nature of the client’s operations, including its business

3. Information concerning the attitude of the client’s principal

owners, key management and those charged with its

governance towards such matters as aggressive interpretation

of accounting standards and the internal control environment.

4. Whether the client is aggressively concerned with maintaining

the firm’s fees as low as possible.

5. Indications of an inappropriate limitation in the scope of work.

6. Indications that the client might be involved in money

laundering or other criminal activities.

7. The reasons for the proposed appointment of the firm and

non-reappointment of the previous firm.

The extent of knowledge a firm will have regarding the integrity

of a client will generally grow within the context of an ongoing

relationship with that client.

currently carrying out the audit of Wisdom Ltd., a manufacturer of

you on site to discuss those issues.

Compiled by: Pankaj Garg

capable hands. Comment on the situation outlines above.

Answer: Quality Control Issues in an engagement:

• SQC – 1 “Quality Control for Firms that perform Audits and

Reviews of Historical Financial Information and Other Assurance

and Related Services Engagements” requires a firm to establish

the policies & procedures for dealing/resolving differences of

opinion with in engagement team.

• An engagement partner is usually appointed to each audit

engagement undertaken by the firm, to take responsibility for

the engagement on behalf of the firm. Assigning the audit to an

experienced audit manager is not sufficient.

• SA 220 “Quality Control for an Audit of Financial Statement”,

requires that the audit engagement partner takes responsibility

for settling disputes in accordance with the firm’s policy in

respect of resolution of difference of opinion required by SQC 1.

• In the present case, partners of the firm have decided to leave